Does ADVA Optical Networking SE’s (ETR:ADV) Stock Price Account For Its Growth?

Growth expectations for ADVA Optical Networking SE (ETR:ADV) are high, but many investors are starting to ask whether its last close at €5.7 can still be rationalized by the future potential. Below I will be talking through a basic metric which will help answer this question.

See our latest analysis for ADVA Optical Networking

What are the future expectations?

ADVA Optical Networking is poised for extremely high earnings growth in the near future. Expectations from 3 analysts are extremely bullish with earnings per share estimated to surge from current levels of €0.198 to €0.393 over the next three years. This indicates an estimated earnings growth rate of 27% per year, on average, which illustrates a highly optimistic outlook in the near term.

Can ADV’s share price be justified by its earnings growth?

ADV is available at a PE (price-to-earnings) ratio of 28.81x today, which tells us the stock is undervalued based on its latest annual earnings update compared to the Communications average of 28.81x , and overvalued compared to the DE market average ratio of 18.67x .

XTRA:ADV Price Estimation Relative to Market, August 16th 2019
XTRA:ADV Price Estimation Relative to Market, August 16th 2019

We already know that ADV appears to be undervalued based on its PE ratio, compared to the industry average. However, to be able to properly assess the value of a high-growth stock such as ADVA Optical Networking, we must incorporate its earnings growth in our valuation. The PEG ratio is a great calculation to take account of growth in the stock’s valuation. A PE ratio of 28.81x and expected year-on-year earnings growth of 27% give ADVA Optical Networking an acceptable PEG ratio of 1.08x. Based on this growth, ADVA Optical Networking’s stock can be considered slightly overvalued , based on its fundamentals.

What this means for you:

ADV’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 highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Are ADV’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.
  2. Past Track Record: Has ADV 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 ADV’s historicals for more clarity.
  3. 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 editorial-team@simplywallst.com. 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.