Does The Hype Around Vanda Pharmaceuticals Inc.’s (NASDAQ:VNDA) Growth Justify Its June Share Price?

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Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) is considered a high-growth stock, but its last closing price of $14.62 left some investors wondering if this high future earnings potential can be rationalized by its current price tag. Let’s take a look at some key metrics to determine whether there’s any value here for current and potential future investors.

Check out our latest analysis for Vanda Pharmaceuticals

How is VNDA going to perform in the future?

If you are bullish about Vanda Pharmaceuticals’s growth potential then you are certainly not alone. The consensus forecast from 5 analysts is extremely bullish with earnings per share estimated to rise from today’s level of $0.410 to $0.597 over the next three years. On average, this leads to a growth rate of 38% each year, which indicates an exceedlingly positive future in the near term.

Is VNDA’s share price justifiable by its earnings growth?

Vanda Pharmaceuticals is looking rather expensive based on its price-to-earnings (PE) ratio of 35.63x. This illustrates that Vanda Pharmaceuticals is overvalued compared to the US market average ratio of 17.9x , and overvalued based on current earnings compared to the Biotechs industry average of 19.23x .

NasdaqGM:VNDA Price Estimation Relative to Market, June 20th 2019
NasdaqGM:VNDA Price Estimation Relative to Market, June 20th 2019

We already know that VNDA appears to be overvalued when compared to its industry average. But, to be able to properly assess the value of a high-growth stock such as Vanda Pharmaceuticals, we must incorporate its earnings growth in our valuation. The PEG ratio is a great calculation to take account of growth in the stock’s valuation. A PE ratio of 35.63x and expected year-on-year earnings growth of 38% give Vanda Pharmaceuticals a low PEG ratio of 0.93x. This tells us that when we include its growth in our analysis Vanda Pharmaceuticals’s stock can be considered fairly valued , based on its fundamentals.

What this means for you:

VNDA’s current undervaluation could signal a potential buying opportunity to increase your exposure to the stock, or it you’re a potential investor, now may 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 VNDA’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. Past Track Record: Has VNDA been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of VNDA’s historicals for more clarity.
  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.