With a price-to-earnings (or "P/E") ratio of 35x Nasdaq, Inc. (NASDAQ:NDAQ) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 17x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
With earnings that are retreating more than the market's of late, Nasdaq has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
NasdaqGS:NDAQ Price to Earnings Ratio vs Industry May 10th 2024
Want the full picture on analyst estimates for the company? Then our free report on Nasdaq will help you uncover what's on the horizon.
Is There Enough Growth For Nasdaq?
The only time you'd be truly comfortable seeing a P/E as steep as Nasdaq's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 19%. As a result, earnings from three years ago have also fallen 18% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 15% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 9.8% each year, which is noticeably less attractive.
With this information, we can see why Nasdaq is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Nasdaq's P/E?
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 Nasdaq'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.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Nasdaq (1 is a bit unpleasant!) that you need to be mindful of.
Of course, you might also be able to find a better stock than Nasdaq. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.