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.
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 .
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:
- 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.
- 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.
- 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.
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