When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Akamai Technologies, Inc. (NASDAQ:AKAM) as a stock to avoid entirely with its 35x 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.
Akamai Technologies 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.
See our latest analysis for Akamai Technologies
NasdaqGS:AKAM Price to Earnings Ratio vs Industry December 24th 2023
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Akamai Technologies.
How Is Akamai Technologies' Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as Akamai Technologies' is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 3.5% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 1.5% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 23% each year as estimated by the analysts watching the company. With the market only predicted to deliver 13% each year, the company is positioned for a stronger earnings result.
With this information, we can see why Akamai Technologies 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 Final Word
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of Akamai Technologies' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Akamai Technologies that you need to be mindful of.
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.