SPS Commerce, Inc. (NASDAQ:SPSC) is considered a high growth stock. However its last closing price of $100.57 left investors wondering whether this growth has already been factored into the share price. Below I will be talking through a basic metric which will help answer this question.
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How is SPSC going to perform in the future?
The excitement around SPS Commerce’s growth potential is not unfounded. The consensus forecast from 11 analysts is extremely positive with earnings forecasted to rise significantly from today’s level of $1.586 to $1.941 over the next three years. On average, this leads to a growth rate of 16% each year, which illustrates a highly optimistic outlook in the near term.
Is SPSC available at a good price after accounting for its growth?
The stock is trading at a lofty price-to-earnings (PE) ratio of 63.39x, telling us that SPS Commerce is overvalued based on current earnings compared to the Software industry average of 54.58x , and overvalued compared to the US market average ratio of 17.36x .
We already know that SPSC appears to be overvalued when compared to its industry average. But, to be able to properly assess the value of a high-growth stock such as SPS Commerce, we must incorporate its earnings growth in our valuation. The PEG ratio is a great calculation to take account of growth in the stock’s valuation. A PE ratio of 63.39x and expected year-on-year earnings growth of 16% give SPS Commerce a quite high PEG ratio of 4.08x. So, when we include the growth factor in our analysis, SPS Commerce appears overvalued , based on its fundamentals.
What this means for you:
SPSC’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Financial Health: Are SPSC’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has SPSC been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of SPSC’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.