AP Memory Technology Corporation (TWSE:6531) Shares May Have Slumped 30% But Getting In Cheap Is Still Unlikely

AP Memory Technology Corporation (TWSE:6531) shareholders that were waiting for something to happen have been dealt a blow with a 30% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 22% in that time.

In spite of the heavy fall in price, given around half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 22x, you may still consider AP Memory Technology as a stock to potentially avoid with its 25.7x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for AP Memory Technology as its earnings have risen in spite of the market's earnings going into reverse. 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 AP Memory Technology

If you'd like to see what analysts are forecasting going forward, you should check out our free report on AP Memory Technology.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 21% gain to the company's bottom line. Pleasingly, EPS has also lifted 44% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings growth is heading into negative territory, declining 6.0% over the next year. Meanwhile, the broader market is forecast to expand by 23%, which paints a poor picture.

With this information, we find it concerning that AP Memory Technology is trading at a P/E higher than the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Final Word

There's still some solid strength behind AP Memory Technology's P/E, if not its share price lately. 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 AP Memory Technology currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - AP Memory Technology has 1 warning sign we think you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com