Data Storage Corporation's (NASDAQ:DTST) 29% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/E Ratio

The Data Storage Corporation (NASDAQ:DTST) share price has fared very poorly over the last month, falling by a substantial 29%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 72% loss during that time.

Although its price has dipped substantially, Data Storage may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 77.8x, since almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 8x are not unusual. 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.

Recent times have been advantageous for Data Storage as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Data Storage

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Keen to find out how analysts think Data Storage's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

Data Storage's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 134% last year. Still, incredibly EPS has fallen 33% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 199% during the coming year according to the sole analyst following the company. That's not great when the rest of the market is expected to grow by 9.8%.

In light of this, it's alarming that Data Storage's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Final Word

A significant share price dive has done very little to deflate Data Storage's very lofty P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Data Storage currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 5 warning signs we've spotted with Data Storage (including 2 which don't sit too well with us).

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 P/E below 20x.

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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.