Despite an already strong run, Aspen Technology, Inc. (NASDAQ:AZPN) shares have been powering on, with a gain of 29% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 49% in the last year.
After such a large jump in price, Aspen Technology may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 48.9x, since almost half of all companies in the United States have P/E ratios under 15x and even P/E's lower than 8x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
While the market has experienced earnings growth lately, Aspen Technology's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
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Is There Enough Growth For Aspen Technology?
In order to justify its P/E ratio, Aspen Technology would need to produce outstanding growth well in excess of 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 13%. Regardless, EPS has managed to lift by a handy 27% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.
Turning to the outlook, the next year should generate growth of 5.8% as estimated by the dual analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 10%, which is noticeably more attractive.
With this information, we find it concerning that Aspen Technology is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.
The Final Word
Aspen Technology's P/E is flying high just like its stock has during the last month. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.