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Sea Limited (NYSE:SE) shares have had a horrible month, losing 27% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 17% share price drop.
Although its price has dipped substantially, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 16x, you may still consider Sea as a highly attractive investment with its -36.5x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Sea certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
See our latest analysis for Sea
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Sea's earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Sea would need to produce anemic growth that's substantially trailing the market.
If we review the last year of earnings growth, the company posted a terrific increase of 57%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 5.9% shows it's noticeably less attractive on an annualised basis.
With this information, we can see why Sea is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
The Key Takeaway
Having almost fallen off a cliff, Sea's share price has pulled its P/E way down as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Sea revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.