With a median price-to-earnings (or "P/E") ratio of close to 17x in the United States, you could be forgiven for feeling indifferent about Dropbox, Inc.'s (NASDAQ:DBX) P/E ratio of 18.6x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Recent times have been pleasing for Dropbox as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient 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 not quite in favour.
See our latest analysis for Dropbox
How Is Dropbox's Growth Trending?
In order to justify its P/E ratio, Dropbox would need to produce growth that's similar to the market.
Retrospectively, the last year delivered an exceptional 69% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 700% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 6.1% per annum as estimated by the twelve analysts watching the company. Meanwhile, the broader market is forecast to expand by 12% per annum, which paints a poor picture.
In light of this, it's somewhat alarming that Dropbox's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.
The Bottom Line On Dropbox's P/E
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.
We've established that Dropbox currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Before you settle on your opinion, we've discovered 4 warning signs for Dropbox (2 can't be ignored!) that you should be aware of.
If these risks are making you reconsider your opinion on Dropbox, 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.