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carsales.com Ltd (ASX:CAR) is a stock well-positioned for future growth, but many investors are wondering whether its last closing price of A$13.76 is based on unrealistic expectations. Let’s take a look at some key metrics to determine whether there’s any value here for current and potential future investors.
What can we expect from CAR in the future?
The excitement around carsales.com’s growth potential is not unfounded. The consensus forecast from 13 analysts is extremely bullish with earnings forecasted to rise significantly from today’s level of A$0.560 to A$0.662 over the next three years. On average, this leads to a growth rate of 17% each year, which indicates an exceedlingly positive future in the near term.
Is CAR’s share price justified by its earnings growth?
CAR is available at a PE (price-to-earnings) ratio of 24.58x today, which tells us the stock is undervalued based on its latest annual earnings update compared to the Interactive Media and Services average of 26.3x , and overvalued compared to the AU market average ratio of 16.25x .
We already know that CAR appears to be undervalued based on its PE ratio, compared to the industry average. But, to properly examine the value of a high-growth stock such as carsales.com, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 24.58x and expected year-on-year earnings growth of 17% give carsales.com a higher PEG ratio of 1.44x. This tells us that when we include its growth in our analysis carsales.com’s stock can be considered slightly overvalued , based on the fundamentals.
What this means for you:
CAR’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Financial Health: Are CAR’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has CAR been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of CAR’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.