ACI Worldwide, Inc.'s (NASDAQ:ACIW) Business Is Yet to Catch Up With Its Share Price

It's not a stretch to say that ACI Worldwide, Inc.'s (NASDAQ:ACIW) price-to-earnings (or "P/E") ratio of 18x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 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.

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With earnings growth that's superior to most other companies of late, ACI Worldwide has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for ACI Worldwide

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

Is There Some Growth For ACI Worldwide?

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

Retrospectively, the last year delivered an exceptional 17% gain to the company's bottom line. Pleasingly, EPS has also lifted 81% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 0.8% over the next year. That's shaping up to be materially lower than the 16% growth forecast for the broader market.

In light of this, it's curious that ACI Worldwide's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From ACI Worldwide's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that ACI Worldwide currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for ACI Worldwide that you need to take into consideration.

If you're unsure about the strength of ACI Worldwide's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.