Some Sonic Foundry, Inc. (NASDAQ:SOFO) Shareholders Look For Exit As Shares Take 34% Pounding

To the annoyance of some shareholders, Sonic Foundry, Inc. (NASDAQ:SOFO) shares are down a considerable 34% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 55% share price decline.

In spite of the heavy fall in price, Sonic Foundry may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 23.6x, since almost half of all companies in the United States have P/E ratios under 15x and even P/E's lower than 8x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

As an illustration, earnings have deteriorated at Sonic Foundry over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Sonic Foundry

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Sonic Foundry will help you shine a light on its historical performance.

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Sonic Foundry's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 36% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 10.0% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Sonic Foundry is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Sonic Foundry's P/E?

A significant share price dive has done very little to deflate Sonic Foundry's very lofty P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Sonic Foundry revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Sonic Foundry is showing 4 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of Sonic Foundry'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.