Optimistic Investors Push ChannelAdvisor Corporation (NYSE:ECOM) Shares Up 56% But Growth Is Lacking

Despite an already strong run, ChannelAdvisor Corporation (NYSE:ECOM) shares have been powering on, with a gain of 56% in the last thirty days. The annual gain comes to 150% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 21x, you may consider ChannelAdvisor as a stock to avoid entirely with its 43.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

ChannelAdvisor certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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.

Check out our latest analysis for ChannelAdvisor

If you'd like to see what analysts are forecasting going forward, you should check out our free report on ChannelAdvisor.

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

The only time you'd be truly comfortable seeing a P/E as steep as ChannelAdvisor's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 420% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. 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 16% per year during the coming three years according to the four analysts following the company. With the market predicted to deliver 15% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that ChannelAdvisor is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On ChannelAdvisor's P/E

The strong share price surge has got ChannelAdvisor's P/E rushing to great heights as well. 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 ChannelAdvisor'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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 3 warning signs for ChannelAdvisor that you need to take into consideration.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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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. 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.
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