Have Investors Priced In Sogou Inc.’s (NYSE:SOGO) Growth?

Sogou Inc. (NYSE:SOGO) is considered a high-growth stock, but its last closing price of $6.34 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.

View our latest analysis for Sogou

What are the future expectations?

The excitement around Sogou’s growth potential is not unfounded. Expectations from 7 analysts are extremely positive with earnings forecasted to rise significantly from today’s level of $0.254 to $0.293 over the next three years. This results in an annual growth rate of 16%, on average, which illustrates a highly optimistic outlook in the near term.

Is SOGO available at a good price after accounting for its growth?

As the legendary value investor Ben Graham once said, “Price is what you pay, value is what you get.” Sogou is trading at price-to-earnings (PE) ratio of 24.95x, which tells us the stock is undervalued based on its latest annual earnings update compared to the Interactive Media and Services average of 25.15x , and overvalued compared to the US market average ratio of 17.5x .

NYSE:SOGO Price Estimation Relative to Market, March 12th 2019
NYSE:SOGO Price Estimation Relative to Market, March 12th 2019

We already know that SOGO appears to be undervalued based on its PE ratio, compared to the industry average. However, since Sogou is a high-growth stock, we must also account for its earnings growth by using calculation called the PEG ratio. A PE ratio of 24.95x and expected year-on-year earnings growth of 16% give Sogou a higher PEG ratio of 1.55x. This tells us that when we include its growth in our analysis Sogou’s stock can be considered a bit overvalued , based on its fundamentals.

What this means for you:

SOGO’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 highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Are SOGO’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.
  2. Valuation: What is SOGO worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SOGO is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.