Yahoo Finance Should You Sell Weibo Corporation (NASDAQ:WB) At This PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between Weibo Corporation (NASDAQ:WB)’s fundamentals and stock market performance.
Weibo Corporation (NASDAQ:WB) is currently trading at a trailing P/E of 55.4x, which is higher than the industry average of 33.2x. While this makes WB appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Weibo
Demystifying the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for WB
Price-Earnings Ratio = Price per share ÷ Earnings per share
WB Price-Earnings Ratio = $101.17 ÷ $1.826 = 55.4x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to WB, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. WB’s P/E of 55.4x is higher than its industry peers (33.2x), which implies that each dollar of WB’s earnings is being overvalued by investors. As such, our analysis shows that WB represents an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that WB should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to WB, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with WB, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing WB to are fairly valued by the market. If this does not hold true, WB’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in WB. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for WB’s future growth? Take a look at our free research report of analyst consensus for WB’s outlook.
Past Track Record: Has WB been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of WB’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
