With a price-to-earnings (or "P/E") ratio of 22.9x Akamai Technologies, Inc. (NASDAQ:AKAM) may be sending 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.  However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.  

With its earnings growth in positive territory compared to the declining earnings of most other companies, Akamai Technologies has been doing quite well of late.   It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock.  You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.    

NasdaqGS:AKAM Price to Earnings Ratio vs Industry May 27th 2024

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Akamai Technologies.

Is There Enough Growth For Akamai Technologies?  

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

Taking a look back first, we see that the company grew earnings per share by an impressive 34% last year.    The latest three year period has also seen a 13% overall rise in EPS, aided extensively by its short-term performance.  So we can start by confirming that the company has actually done a good job of growing earnings over that time.  

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 9.7% per annum over the next three years.  With the market predicted to deliver 10.0% growth  per annum, the company is positioned for a comparable earnings result.

In light of this, it's curious that Akamai Technologies' P/E sits above the majority of other companies.  It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock.  These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.  

What We Can Learn From Akamai Technologies' P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Akamai Technologies currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market.  When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower.  Unless these conditions improve, it's challenging to accept these prices as being reasonable.    

We don't want to rain on the parade too much, but we did also find 1 warning sign for Akamai Technologies that you need to be mindful 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 low P/E.  

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