SolarEdge Technologies, Inc.'s (NASDAQ:SEDG) Shareholders Might Be Looking For Exit

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider SolarEdge Technologies, Inc. (NASDAQ:SEDG) as a stock to avoid entirely with its 25.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, SolarEdge Technologies has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for SolarEdge Technologies

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

Is There Enough Growth For SolarEdge Technologies?

In order to justify its P/E ratio, SolarEdge Technologies would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 84%. EPS has also lifted 8.2% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 0.08% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 12% per annum growth forecast for the broader market.

With this information, we find it concerning that SolarEdge Technologies is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On SolarEdge Technologies' P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of SolarEdge Technologies' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for SolarEdge Technologies that you should be aware of.

If these risks are making you reconsider your opinion on SolarEdge Technologies, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.