Vimeo, Inc.’s (NASDAQ:VMEO) 36% share price rise doesn’t quite add up

Vimeo, Inc. (NASDAQ:VMEO) shareholders would be excited to see the stock price having a great month, posting a 36% increase and recovering from previous weakness. Looking back a little further, it’s encouraging to see that the stock is up 79% in the last year.

Given the significant stock price recovery, and given that nearly half of the companies in the United States have price-to-earnings (or “P/E”) ratios below 19x, you can consider Vimeo with a price-to-earnings ratio of 33x as one Consider stocks that you should avoid altogether. E ratio. However, the P/E ratio might be quite high for a reason and further research is needed to determine whether it is justified.

Vimeo has certainly done a good job recently, as the company has grown its profits more than most other companies. It seems many are expecting the strong earnings performance to continue, which has increased the P/E ratio. If not, existing shareholders may be a little nervous about the sustainability of the share price.

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What do growth metrics tell us about the high P/E ratio?

Vimeo’s price-to-earnings ratio would be typical of a company that is expected to have very strong growth and, above all, to perform significantly better than the market.

Looking back, last year resulted in an extraordinary 300% increase in company profits. Still, overall earnings per share are barely up compared to three years ago, which isn’t ideal. Therefore, it’s fair to say that the company’s earnings growth has been inconsistent recently.

Earnings per share are expected to grow 7.5% per year over the next three years, according to the four analysts who cover the company. The rest of the market, however, is forecast to grow by 11% per year, which is much more attractive.

Based on this information, we find it concerning that Vimeo is trading at a P/E ratio above the market. It seems that most investors are hoping for a turnaround in the company’s business prospects, but the analyst cohort is not as confident that this will happen. There’s a good chance these shareholders are setting themselves up for future disappointment if the P/E ratio falls to a level more in line with its growth prospects.

What can we learn from Vimeo’s P/E ratio?

The sharp increase in the share price has also catapulted Vimeo’s P/E ratio to great heights. We would say that the price-to-earnings ratio is not primarily a valuation tool, but rather is used to measure current investor sentiment and future expectations.

We’ve found that Vimeo is currently trading at a much higher price-to-earnings ratio than expected, as its forecast growth is lower than that of the broader market. At the moment, we are becoming increasingly uneasy about the high P/E ratio, as forecast future earnings are unlikely to support this positive sentiment for long. Unless these conditions improve significantly, it will be very difficult to accept these prices as reasonable.

Be aware of this Vimeo shows 1 warning sign You should know about this in our investment analysis.

If yes unsure about the strength of Vimeo’s businessExplore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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