Akamai Technologies, Inc.'s (NASDAQ:AKAM) price-to-earnings (or "P/E") ratio of 28.1x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 19x and even P/E's below 11x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
With earnings growth that's superior to most other companies of late, Akamai Technologies has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
View our latest analysis for Akamai Technologies
Does Growth Match The High P/E?
In order to justify its P/E ratio, Akamai Technologies would need to produce impressive growth in excess of the market.
If we review the last year of earnings growth, the company posted a worthy increase of 3.8%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 5.6% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 19% each year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 11% each year growth forecast for the broader market.
In light of this, it's understandable that Akamai Technologies' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
What We Can Learn From Akamai 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.
As we suspected, our examination of Akamai Technologies' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Akamai Technologies with six simple checks.
If these risks are making you reconsider your opinion on Akamai 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.
About NasdaqGS:AKAM
Akamai Technologies
Provides cloud computing, security, and content delivery services in the United States and internationally.
Undervalued with proven track record.
