Semler Scientific, Inc. (NASDAQ:SMLR) Stock's 25% Dive Might Signal An Opportunity But It Requires Some Scrutiny

Unfortunately for some shareholders, the Semler Scientific, Inc. (NASDAQ:SMLR) share price has dived 25% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 20% share price drop.

In spite of the heavy fall in price, Semler Scientific may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 9.1x, since almost half of all companies in the United States have P/E ratios greater than 18x and even P/E's higher than 32x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been quite advantageous for Semler Scientific as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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 Semler Scientific

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Is There Any Growth For Semler Scientific?

Semler Scientific's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 85% gain to the company's bottom line. The latest three year period has also seen an excellent 67% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 14% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that Semler Scientific is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

Semler Scientific's P/E has taken a tumble along with its share price. 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 Semler Scientific currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Semler Scientific (1 doesn't sit too well with us!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Semler Scientific, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.