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CoStar Group, Inc. (NASDAQ:CSGP) is considered a high-growth stock, but its last closing price of $498.18 left some investors wondering if this high future earnings potential can be rationalized by its current price tag. Below I will be talking through a basic metric which will help answer this question.
Should you get excited about CSGP’s future?
CoStar Group’s growth potential is very attractive. The consensus forecast from 11 analysts is extremely bullish with earnings per share estimated to rise from today’s level of $7.505 to $13.095 over the next three years. This results in an annual growth rate of 20%, on average, which illustrates a highly optimistic outlook in the near term.
Is CSGP’s share price justified by its earnings growth?
CSGP is trading at a very high price-to-earnings (PE) ratio of 66.38x, meaning CoStar Group is overvalued based on current earnings compared to the Professional Services industry average of 21.98x , and overvalued compared to the US market average ratio of 18.07x .
We already know that CSGP appears to be overvalued when compared to its industry average. However, since CoStar Group is a high-growth stock, we must also account for its earnings growth by using calculation called the PEG ratio. A PE ratio of 66.38x and expected year-on-year earnings growth of 20% give CoStar Group a quite high PEG ratio of 3.36x. So, when we include the growth factor in our analysis, CoStar Group appears overvalued , based on its fundamentals.
What this means for you:
CSGP’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Financial Health: Are CSGP’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has CSGP been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of CSGP’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.