Yahoo Finance Why IAC/InterActiveCorp’s (NASDAQ:IAC) High P/E Ratio Isn’t Necessarily A Bad Thing
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
IAC/InterActiveCorp (NASDAQ:IAC) is trading with a trailing P/E of 31.1, which is higher than the industry average of 26.2. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
See our latest analysis for IAC/InterActiveCorp
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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.
P/E Calculation for IAC
Price-Earnings Ratio = Price per share ÷ Earnings per share
IAC Price-Earnings Ratio = $189.25 ÷ $6.089 = 31.1x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to IAC, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. IAC’s P/E of 31.1 is higher than its industry peers (26.2), which implies that each dollar of IAC’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 22 Interactive Media and Services companies in US including DHI Group, Cars.com and Yandex. You could also say that the market is suggesting that IAC 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. Firstly, that our peer group contains companies that are similar to IAC. If this isn’t the case, the difference in P/E could be due to other factors. For example, if IAC/InterActiveCorp is growing faster than its peers, then it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with IAC are not 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:
Since you may have already conducted your due diligence on IAC, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for IAC’s future growth? Take a look at our free research report of analyst consensus for IAC’s outlook.
Past Track Record: Has IAC 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 IAC’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 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.
