GoDaddy Inc. (NYSE:GDDY) Stock Catapults 26% Though Its Price And Business Still Lag The Market

Despite an already strong run, GoDaddy Inc. (NYSE:GDDY) shares have been powering on, with a gain of 26% in the last thirty days. The last month tops off a massive increase of 102% in the last year.

Although its price has surged higher, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 20x, you may still consider GoDaddy as an attractive investment with its 15.8x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings growth that's superior to most other companies of late, GoDaddy has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for GoDaddy

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

Is There Any Growth For GoDaddy?

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

If we review the last year of earnings growth, the company posted a terrific increase of 460%. The latest three year period has also seen an excellent 885% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 9.1% per year over the next three years. Meanwhile, the broader market is forecast to expand by 11% each year, which paints a poor picture.

In light of this, it's understandable that GoDaddy's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

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

Despite GoDaddy's shares building up a head of steam, its P/E still lags most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of GoDaddy's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with GoDaddy (at least 2 which are significant), and understanding them should be part of your investment process.

You might be able to find a better investment than GoDaddy. 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.