GMO Internet (TSE:4784): Valuation in Focus After Earnings Turnaround and Special Dividends

GMO internet (TSE:4784) caught investors’ attention after announcing a swing from a net loss to substantial profit over the past nine months. The company also introduced new and increased dividends for shareholders this quarter.

See our latest analysis for GMO internet.

After swinging to profit and announcing fresh shareholder rewards, GMO Internet’s momentum appears to be resetting. While the one-year total shareholder return is up a healthy 17.8%, recent share price performance has cooled considerably. The stock has seen a 27% drop in the past month and a 46.8% slide over ninety days. Despite that, investors who stuck with the stock for three years saw a 78.5% total return, highlighting the potential for strong rewards when sentiment improves.

If this kind of turnaround story has you wondering what else is out there, now is the time to broaden your investing radar and discover fast growing stocks with high insider ownership

The recent financial rebound and new shareholder rewards raise the question: is GMO internet trading below its true value, or has the market already factored in this surge in growth?

Price-to-Earnings of 51.7x: Is it justified?

GMO Internet currently trades at a price-to-earnings (P/E) ratio of 51.7x, which is notably higher than both its industry peers and historic averages. This is occurring even while the recent return to profitability has supported a lift in the share price.

The price-to-earnings ratio measures how much investors are willing to pay for each yen of the company’s earnings. This makes it especially relevant for evaluating profit-driven businesses in a sector like media.

With its P/E ratio, the market seems to be rewarding GMO Internet’s profit rebound. However, the premium is well above the Japanese Media industry average of 16.3x. The stock is also priced significantly above its estimated fair P/E ratio of 41.3x, suggesting that expectations may be running high.

If the market resets expectations or if profit growth slows, valuation multiples could fall closer to that fair ratio.

Explore the SWS fair ratio for GMO internet

Result: Price-to-Earnings of 51.7x (OVERVALUED)

However, rapid sentiment shifts or slower earnings growth could pressure valuations and quickly reverse investor optimism around GMO Internet’s recent turnaround.

Find out about the key risks to this GMO internet narrative.

Another View: SWS DCF Model Offers a Different Perspective

While the price-to-earnings ratio suggests GMO Internet may be overvalued compared to the industry, our SWS DCF model reaches a similar conclusion. According to this method, the company’s current price of ¥765 is above the estimated fair value of ¥513.75, which suggests limited upside. But does this mean investors should steer clear, or is there more to the story?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out GMO internet for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 928 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own GMO internet Narrative

If you see things differently or prefer a hands-on approach, you can easily build your own view of GMO internet in just a few minutes. Do it your way

A great starting point for your GMO internet research is our analysis highlighting 2 key rewards and 3 important warning signs that could impact your investment decision.

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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.

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