Subdued Growth No Barrier To LifeVantage Corporation (NASDAQ:LFVN) With Shares Advancing 63%

Simply Wall St · 5d ago

LifeVantage Corporation (NASDAQ:LFVN) shares have continued their recent momentum with a 63% gain in the last month alone. The annual gain comes to 101% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, LifeVantage may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 55.2x, since almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 10x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

The earnings growth achieved at LifeVantage over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for LifeVantage

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NasdaqCM:LFVN Price to Earnings Ratio vs Industry September 29th 2024
Although there are no analyst estimates available for LifeVantage, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as LifeVantage's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 17% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 74% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 15% shows it's an unpleasant look.

With this information, we find it concerning that LifeVantage is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

The strong share price surge has got LifeVantage's P/E rushing to great heights as well. 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.

We've established that LifeVantage currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 3 warning signs for LifeVantage (1 can't be ignored!) that you should be aware of.

If you're unsure about the strength of LifeVantage's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.