With a price-to-earnings (or "P/E") ratio of 13.5x InterDigital, Inc. (NASDAQ:IDCC) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 33x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for InterDigital as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
View our latest analysis for InterDigital
NasdaqGS:IDCC Price to Earnings Ratio vs Industry December 18th 2023
If you'd like to see what analysts are forecasting going forward, you should check out our free report on InterDigital.
What Are Growth Metrics Telling Us About The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as InterDigital's is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 172%. Pleasingly, EPS has also lifted 315% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 36% over the next year. With the market predicted to deliver 10% growth , that's a disappointing outcome.
With this information, we are not surprised that InterDigital is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
What We Can Learn From InterDigital's P/E?
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.
As we suspected, our examination of InterDigital's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.
We don't want to rain on the parade too much, but we did also find 1 warning sign for InterDigital 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.
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