Arhaus, Inc. (NASDAQ:ARHS) Might Not Be As Mispriced As It Looks After Plunging 27%

Arhaus, Inc. (NASDAQ:ARHS) shares have had a horrible month, losing 27% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 30% in that time.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Arhaus' P/E ratio of 18.4x, since the median price-to-earnings (or "P/E") ratio in the United States is also close to 18x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Arhaus hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Arhaus

Keen to find out how analysts think Arhaus' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Arhaus' Growth Trending?

In order to justify its P/E ratio, Arhaus would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 45% decrease to the company's bottom line. Even so, admirably EPS has lifted 168% 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.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 13% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 11% each year, which is noticeably less attractive.

With this information, we find it interesting that Arhaus is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

With its share price falling into a hole, the P/E for Arhaus looks quite average now. 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.

Our examination of Arhaus' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Arhaus (1 is potentially serious!) that you should be aware of.

You might be able to find a better investment than Arhaus. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.