Hatena Co., Ltd.'s (TSE:3930) 26% Price Boost Is Out Of Tune With Earnings

Hatena Co., Ltd. (TSE:3930) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 129% in the last year.

Since its price has surged higher, Hatena's price-to-earnings (or "P/E") ratio of 24.9x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 13x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's exceedingly strong of late, Hatena has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Hatena

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

Is There Enough Growth For Hatena?

In order to justify its P/E ratio, Hatena would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 205%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 23% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 8.2% shows it's an unpleasant look.

With this information, we find it concerning that Hatena is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Hatena's P/E?

The strong share price surge has got Hatena's P/E rushing to great heights as well. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Hatena revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Hatena you should be aware of, and 1 of them can't be ignored.

If you're unsure about the strength of Hatena's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.