MediaTek Inc. (TWSE:2454) Looks Just Right With A 28% Price Jump

MediaTek Inc. (TWSE:2454) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 74% in the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about MediaTek's P/E ratio of 22.3x, since the median price-to-earnings (or "P/E") ratio in Taiwan is also close to 22x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times haven't been advantageous for MediaTek as its earnings have been falling quicker than most other companies. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

View our latest analysis for MediaTek

Keen to find out how analysts think MediaTek's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Growth For MediaTek?

The only time you'd be comfortable seeing a P/E like MediaTek's is when the company's growth is tracking the market closely.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 10%. Even so, admirably EPS has lifted 49% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 13% per year over the next three years. That's shaping up to be similar to the 12% per year growth forecast for the broader market.

In light of this, it's understandable that MediaTek's P/E sits in line with the majority of other companies. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

The Final Word

Its shares have lifted substantially and now MediaTek's P/E is also back up to the market median. 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.

As we suspected, our examination of MediaTek's analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. It's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for MediaTek that you need to take into consideration.

You might be able to find a better investment than MediaTek. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.