Investors Appear Satisfied With Gogo Inc.'s (NASDAQ:GOGO) Prospects

With a price-to-earnings (or "P/E") ratio of 20.2x Gogo Inc. (NASDAQ:GOGO) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 15x and even P/E's lower than 7x 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 lofty.

Gogo could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Gogo

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

Is There Enough Growth For Gogo?

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

Retrospectively, the last year delivered a frustrating 50% decrease to the company's bottom line. 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.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 15% per year over the next three years. That's shaping up to be materially higher than the 9.7% each year growth forecast for the broader market.

In light of this, it's understandable that Gogo's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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.

As we suspected, our examination of Gogo'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. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Gogo (of which 1 is a bit unpleasant!) you should know about.

If these risks are making you reconsider your opinion on Gogo, 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.