Advertisement
UK markets close in 5 hours 46 minutes
  • FTSE 100

    7,717.05
    -5.50 (-0.07%)
     
  • FTSE 250

    19,446.80
    -39.73 (-0.20%)
     
  • AIM

    736.26
    -0.37 (-0.05%)
     
  • GBP/EUR

    1.1695
    -0.0009 (-0.07%)
     
  • GBP/USD

    1.2683
    -0.0046 (-0.36%)
     
  • Bitcoin GBP

    49,763.18
    -3,833.70 (-7.15%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,149.42
    +32.33 (+0.63%)
     
  • DOW

    38,790.43
    +75.63 (+0.20%)
     
  • CRUDE OIL

    82.46
    -0.26 (-0.31%)
     
  • GOLD FUTURES

    2,156.70
    -7.60 (-0.35%)
     
  • NIKKEI 225

    40,003.60
    +263.20 (+0.66%)
     
  • HANG SENG

    16,529.48
    -207.62 (-1.24%)
     
  • DAX

    17,993.69
    +61.01 (+0.34%)
     
  • CAC 40

    8,180.31
    +32.17 (+0.39%)
     

Aspen Technology, Inc.'s (NASDAQ:AZPN) 29% Share Price Surge Not Quite Adding Up

Despite an already strong run, Aspen Technology, Inc. (NASDAQ:AZPN) shares have been powering on, with a gain of 29% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 49% in the last year.

After such a large jump in price, Aspen Technology may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 48.9x, since almost half of all companies in the United States have P/E ratios under 15x and even P/E's lower than 8x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Aspen Technology's earnings have gone into reverse gear, which is not great. 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.

Check out our latest analysis for Aspen Technology

pe
pe

Want the full picture on analyst estimates for the company? Then our free report on Aspen Technology will help you uncover what's on the horizon.

Is There Enough Growth For Aspen Technology?

In order to justify its P/E ratio, Aspen Technology would need to produce outstanding growth well in excess of the market.

ADVERTISEMENT

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 13%. Regardless, EPS has managed to lift by a handy 27% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Turning to the outlook, the next year should generate growth of 5.8% as estimated by the dual analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 10%, which is noticeably more attractive.

With this information, we find it concerning that Aspen Technology is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

Aspen Technology's P/E is flying high just like its stock has during the last month. 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.

Our examination of Aspen Technology's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Aspen Technology is showing 1 warning sign in our investment analysis, you should know about.

You might be able to find a better investment than Aspen Technology. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.