Adeia Inc. (NASDAQ:ADEA) shares have had a horrible month, losing 26% after a relatively good period beforehand. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 54% loss during that time.
After such a large drop in price, Adeia's price-to-earnings (or "P/E") ratio of 6.1x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 15x and even P/E's above 29x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Adeia certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Want the full picture on analyst estimates for the company? Then our free report on Adeia will help you uncover what's on the horizon.
What Are Growth Metrics Telling Us About The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as Adeia's is when the company's growth is on track to lag the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 98% 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 slump, contracting by 66% during the coming year according to the three analysts following the company. With the market predicted to deliver 5.5% growth , that's a disappointing outcome.
In light of this, it's understandable that Adeia's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Bottom Line On Adeia's P/E
Adeia's P/E looks about as weak as its stock price lately. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Adeia maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Adeia (1 is a bit concerning) you should be aware of.
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. 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.
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