Is Five Below, Inc.’s (NASDAQ:FIVE) Growth Strong Enough To Justify Its May Share Price?

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Five Below, Inc. (NASDAQ:FIVE) is considered a high-growth stock, but its last closing price of $147.5 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.

See our latest analysis for Five Below

Exciting times ahead?

Five Below’s extremely high growth potential in the near future is attracting investors. Expectations from 20 analysts are extremely bullish with earnings forecasted to rise significantly from today’s level of $2.684 to $4.595 over the next three years. On average, this leads to a growth rate of 18% each year, which illustrates a highly optimistic outlook in the near term.

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

Five Below is trading at price-to-earnings (PE) ratio of 54.96x, this tells us the stock is overvalued compared to the US market average ratio of 18.27x , and overvalued based on current earnings compared to the Specialty Retail industry average of 16.5x .

NasdaqGS:FIVE Price Estimation Relative to Market, May 2nd 2019
NasdaqGS:FIVE Price Estimation Relative to Market, May 2nd 2019

We already know that FIVE appears to be overvalued when compared to its industry average. However, seeing as Five Below is perceived as a high-growth stock, we must also account for its earnings growth, which is captured in the PEG ratio. A PE ratio of 54.96x and expected year-on-year earnings growth of 18% give Five Below a quite high PEG ratio of 3.07x. So, when we include the growth factor in our analysis, Five Below appears overvalued , based on the fundamentals.

What this means for you:

FIVE’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 urge you to complete your research by taking a look at the following:

  1. Financial Health: Are FIVE’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 FIVE 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 FIVE’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.