InterDigital, Inc.'s (NASDAQ:IDCC) 30% Price Boost Is Out Of Tune With Earnings

InterDigital, Inc. (NASDAQ:IDCC) shares have continued their recent momentum with a 30% gain in the last month alone. The annual gain comes to 149% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, it's still not a stretch to say that InterDigital's price-to-earnings (or "P/E") ratio of 19.3x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 19x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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InterDigital certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for InterDigital

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

How Is InterDigital's Growth Trending?

The only time you'd be comfortable seeing a P/E like InterDigital's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 67% last year. Pleasingly, EPS has also lifted 531% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 21% each year as estimated by the five analysts watching the company. That's not great when the rest of the market is expected to grow by 11% each year.

With this information, we find it concerning that InterDigital is trading at a fairly similar P/E to the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. 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 negative growth outlook.

The Bottom Line On InterDigital's P/E

InterDigital's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of InterDigital's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for InterDigital you should know about.

Of course, you might also be able to find a better stock than InterDigital. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.