momo.com Inc. (TWSE:8454) Investors Are Less Pessimistic Than Expected

With a price-to-earnings (or "P/E") ratio of 29.3x momo.com Inc. (TWSE:8454) may be sending bearish signals at the moment, given that almost half of all companies in Taiwan have P/E ratios under 22x and even P/E's lower than 16x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

momo.com certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for momo.com

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Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like momo.com's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.3% last year. This was backed up an excellent period prior to see EPS up by 52% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 13% per year during the coming three years according to the nine analysts following the company. Meanwhile, the rest of the market is forecast to expand by 12% per year, which is not materially different.

With this information, we find it interesting that momo.com is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

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 momo.com currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for momo.com you should be aware of, and 1 of them is concerning.

Of course, you might also be able to find a better stock than momo.com. So you may wish to see this free collection of other companies that have reasonable P/E ratios 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.