Ubiquiti Inc.'s (NYSE:UI) Popularity With Investors Under Threat As Stock Sinks 26%

The Ubiquiti Inc. (NYSE:UI) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. Looking at the bigger picture, even after this poor month the stock is up 63% in the last year.

In spite of the heavy fall in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may still consider Ubiquiti as a stock to avoid entirely with its 42.6x 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 so lofty.

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Ubiquiti certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Ubiquiti

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

How Is Ubiquiti's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Ubiquiti'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 103% last year. The latest three year period has also seen an excellent 136% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 16% during the coming year according to the one analyst following the company. Meanwhile, the rest of the market is forecast to expand by 16%, which is not materially different.

With this information, we find it interesting that Ubiquiti 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. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Ubiquiti's P/E

Ubiquiti's shares may have retreated, but its P/E is still flying high. 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.

Our examination of Ubiquiti'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.

It is also worth noting that we have found 2 warning signs for Ubiquiti (1 is a bit unpleasant!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Ubiquiti, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.