Those holding Adeia Inc. (NASDAQ:ADEA) shares would be relieved that the share price has rebounded 38% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Taking a wider view, although not as strong as the last month, the full year gain of 22% is also fairly reasonable.
Following the firm bounce in price, Adeia may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 24.9x, since almost half of all companies in the United States have P/E ratios under 19x and even P/E's lower than 11x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, Adeia has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Adeia
Does Growth Match The High P/E?
Adeia's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
Retrospectively, the last year delivered an exceptional 77% gain to the company's bottom line. Still, incredibly EPS has fallen 60% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 11% over the next year. That's shaping up to be materially lower than the 16% growth forecast for the broader market.
With this information, we find it concerning that Adeia 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.
The Bottom Line On Adeia's P/E
The large bounce in Adeia's shares has lifted the company's P/E to a fairly high level. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Adeia currently trades on a much 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 high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Plus, you should also learn about these 3 warning signs we've spotted with Adeia.
If these risks are making you reconsider your opinion on Adeia, 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.