Ziff Davis, Inc.'s (NASDAQ:ZD) Price In Tune With Earnings

Ziff Davis, Inc.'s (NASDAQ:ZD) price-to-earnings (or "P/E") ratio of 32.9x might 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 18x and even P/E's below 10x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Ziff Davis as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Ziff Davis

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

Is There Enough Growth For Ziff Davis?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 36% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 148% over the next year. With the market only predicted to deliver 14%, the company is positioned for a stronger earnings result.

With this information, we can see why Ziff Davis is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Ziff Davis' P/E

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 Ziff Davis maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

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

Of course, you might also be able to find a better stock than Ziff Davis. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.