NASDAQ:NTAP) price-to-earnings (or "P/E") ratio of 11.9x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 20x and even P/E’s above 38x are quite common. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the reduced P/E.” data-reactid=”28″>NetApp, Inc.’s (NASDAQ:NTAP) price-to-earnings (or “P/E”) ratio of 11.9x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 20x and even P/E’s above 38x are quite common. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
With earnings that are retreating more than the market’s of late, NetApp has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you’d want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
View our latest analysis for NetApp ” data-reactid=”30″> View our latest analysis for NetApp
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Is There Any Growth For NetApp?
The only time you’d be truly comfortable seeing a P/E as low as NetApp’s is when the company’s growth is on track to lag the market.
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 23%. Even so, admirably EPS has lifted 104% in aggregate from three years ago, notwithstanding the last 12 months. Although it’s been a bumpy ride, it’s still fair to say the earnings growth recently has been more than adequate for the company.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 0.7% per year as estimated by the analysts watching the company. With the market predicted to deliver 14% growth each year, that’s a disappointing outcome.
In light of this, it’s understandable that NetApp’s P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Bottom Line On NetApp’s P/E
While the price-to-earnings ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of earnings expectations.
As we suspected, our examination of NetApp’s analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won’t provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
3 warning signs for NetApp (1 shouldn’t be ignored!) that you need to take into consideration.” data-reactid=”56″>It is also worth noting that we have found 3 warning signs for NetApp (1 shouldn’t be ignored!) that you need to take into consideration.
list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).” data-reactid=”57″>It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
Get in touch with us directly. Alternatively, email [email protected].” data-reactid=”58″>This article by Simply Wall St is general in nature. 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.