First Solar, Inc. (NASDAQ:FSLR) shares have had a really impressive month, gaining 39% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.1% in the last twelve months.
Even after such a large jump in price, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may still consider First Solar as an attractive investment with its 15.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
With earnings growth that's superior to most other companies of late, First Solar has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for First Solar
Is There Any Growth For First Solar?
First Solar's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Retrospectively, the last year delivered an exceptional 23% gain to the company's bottom line. The latest three year period has also seen an excellent 481% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to climb by 34% each year during the coming three years according to the analysts following the company. With the market only predicted to deliver 10% per annum, the company is positioned for a stronger earnings result.
With this information, we find it odd that First Solar is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Key Takeaway
The latest share price surge wasn't enough to lift First Solar's P/E close to the market median. 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.
We've established that First Solar currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
Having said that, be aware First Solar is showing 2 warning signs in our investment analysis, and 1 of those is potentially serious.
Of course, you might also be able to find a better stock than First Solar. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
Valuation is complex, but we're here to simplify it.
Discover if First Solar might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.