VeriSign, Inc.'s (NASDAQ:VRSN) Shareholders Might Be Looking For Exit

With a price-to-earnings (or "P/E") ratio of 28.8x VeriSign, Inc. (NASDAQ:VRSN) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times haven't been advantageous for VeriSign as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for VeriSign

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

Is There Enough Growth For VeriSign?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 7.0%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 11% per annum during the coming three years according to the four analysts following the company. With the market predicted to deliver 12% growth per annum, the company is positioned for a comparable earnings result.

In light of this, it's curious that VeriSign's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From VeriSign's P/E?

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 VeriSign's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 3 warning signs for VeriSign (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

You might be able to find a better investment than VeriSign. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.