Why Investors Shouldn't Be Surprised By TradeDoubler AB (publ)'s (STO:TRAD) 26% Share Price Plunge

TradeDoubler AB (publ) (STO:TRAD) shares have had a horrible month, losing 26% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 36%, which is great even in a bull market.

Following the heavy fall in price, given close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") above 22x, you may consider TradeDoubler as a highly attractive investment with its 10.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Recent times have been quite advantageous for TradeDoubler as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for TradeDoubler

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on TradeDoubler's earnings, revenue and cash flow.

Is There Any Growth For TradeDoubler?

In order to justify its P/E ratio, TradeDoubler would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 240% gain to the company's bottom line. The latest three year period has also seen an excellent 55% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 20% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why TradeDoubler is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

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

Having almost fallen off a cliff, TradeDoubler's share price has pulled its P/E way down as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that TradeDoubler maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 3 warning signs for TradeDoubler that you need to be mindful of.

Of course, you might also be able to find a better stock than TradeDoubler. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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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.