When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Sogou Inc. (NYSE:SOGO) as a stock to avoid entirely with its 30.1x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
While the market has experienced earnings growth lately, Sogou's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
How Does Sogou's P/E Ratio Compare To Its Industry Peers?
An inspection of average P/E's throughout Sogou's industry may help to explain its particularly high P/E ratio. It turns out the Interactive Media and Services industry in general also has a P/E ratio significantly higher than the market, as the graphic below shows. So we'd say there is merit in the premise that the company's ratio being shaped by its industry at this time. Ordinarily, the majority of companies' P/E's would be lifted firmly by the general conditions within the Interactive Media and Services industry. Nonetheless, the greatest force on the company's P/E will be its own earnings growth expectations.Want the full picture on analyst estimates for the company? Then our free report on Sogou will help you uncover what's on the horizon.
Is There Enough Growth For Sogou?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Sogou's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 22% decrease to the company's bottom line. Even so, admirably EPS has lifted 36% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Turning to the outlook, the next three years should generate growth of 33% each year as estimated by the seven analysts watching the company. With the market only predicted to deliver 8.9% each year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Sogou's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Sogou's P/E
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of Sogou's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Sogou that you need to be mindful of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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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. 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.
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