Investors Appear Satisfied With Super Micro Computer, Inc.'s (NASDAQ:SMCI) Prospects As Shares Rocket 42%

Super Micro Computer, Inc. (NASDAQ:SMCI) shareholders are no doubt pleased to see that the share price has bounced 42% in the last month, although it is still struggling to make up recently lost ground. But the last month did very little to improve the 50% share price decline over the last year.

After such a large jump in price, Super Micro Computer may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 23.2x, since almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 10x 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 as high as it is.

Our free stock report includes 4 warning signs investors should be aware of before investing in Super Micro Computer. Read for free now.

Recent times haven't been advantageous for Super Micro Computer as its earnings have been rising slower than most other companies. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Super Micro Computer

Want the full picture on analyst estimates for the company? Then our free report on Super Micro Computer will help you uncover what's on the horizon.

Is There Enough Growth For Super Micro Computer?

In order to justify its P/E ratio, Super Micro Computer would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Although pleasingly EPS has lifted 436% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 19% as estimated by the analysts watching the company. That's shaping up to be materially higher than the 13% growth forecast for the broader market.

With this information, we can see why Super Micro Computer is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Super Micro Computer's P/E is getting right up there since its shares have risen strongly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Super Micro Computer's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about these 4 warning signs we've spotted with Super Micro Computer (including 1 which makes us a bit uncomfortable).

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.