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Should You Be Tempted To Sell Shutterstock Inc (NYSE:SSTK) Because Of Its PE Ratio?

I am writing today to help inform people who are new to the stock market and want to learn about the link between company’s fundamentals and stock market performance.

Shutterstock Inc (NYSE:SSTK) is trading with a trailing P/E of 41, which is higher than the industry average of 31.5. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it.

View our latest analysis for Shutterstock

Breaking down the Price-Earnings ratio

NYSE:SSTK PE PEG Gauge October 12th 18
NYSE:SSTK PE PEG Gauge October 12th 18

A common ratio used for relative valuation is the P/E ratio. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.

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P/E Calculation for SSTK

Price-Earnings Ratio = Price per share ÷ Earnings per share

SSTK Price-Earnings Ratio = $46.45 ÷ $1.133 = 41x

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 SSTK, 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. At 41, SSTK’s P/E is higher than its industry peers (31.5). This implies that investors are overvaluing each dollar of SSTK’s earnings. This multiple is a median of profitable companies of 24 Online Retail companies in US including Jumei International Holding, Acorn International and Qurate Retail. You could also say that the market is suggesting that SSTK is a stronger business than the average comparable company.

A few caveats

Before you jump to conclusions it is important to realise that there are assumptions in this analysis. The first is that our “similar companies” are actually similar to SSTK. If not, the difference in P/E might be a result of other factors. For example, if Shutterstock Inc is growing faster than its peers, then it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to SSTK may not be fairly valued. Just because it is trading on a higher P/E ratio than its peers does not mean it must be overvalued. After all, the peer group could be undervalued.

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to SSTK. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for SSTK’s future growth? Take a look at our free research report of analyst consensus for SSTK’s outlook.

  2. Past Track Record: Has SSTK 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 SSTK’s historicals for more clarity.

  3. 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.