The Market Doesn't Like What It Sees From Sezzle Inc.'s (ASX:SZL) Earnings Yet As Shares Tumble 32%

Sezzle Inc. (ASX:SZL) shareholders that were waiting for something to happen have been dealt a blow with a 32% share price drop in the last month. The good news is that in the last year, the stock has shone bright like a diamond, gaining 147%.

After such a large drop in price, Sezzle may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of -8.7x, since almost half of all companies in Australia have P/E ratios greater than 17x and even P/E's higher than 33x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings growth that's exceedingly strong of late, Sezzle has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Sezzle

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Sezzle will help you shine a light on its historical performance.

How Is Sezzle's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Sezzle's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 91% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 12% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Sezzle is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Sezzle's P/E

Having almost fallen off a cliff, Sezzle's share price has pulled its P/E way down as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Sezzle revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Sezzle you should know about.

Of course, you might also be able to find a better stock than Sezzle. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.