PubMatic, Inc.'s (NASDAQ:PUBM) 32% Share Price Plunge Could Signal Some Risk

PubMatic, Inc. (NASDAQ:PUBM) shareholders that were waiting for something to happen have been dealt a blow with a 32% 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 50% in that time.

Even after such a large drop in price, PubMatic's price-to-earnings (or "P/E") ratio of 40.6x might still make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been advantageous for PubMatic as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for PubMatic

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

How Is PubMatic's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as PubMatic's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 48%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 77% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 54% during the coming year according to the twelve analysts following the company. That's not great when the rest of the market is expected to grow by 14%.

In light of this, it's alarming that PubMatic's P/E sits above the majority of other companies. 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 Key Takeaway

A significant share price dive has done very little to deflate PubMatic's very lofty P/E. 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.

Our examination of PubMatic's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for PubMatic with six simple checks.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.