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Kingsoft Corporation Limited (HKG:3888), which is in the software business, and is based in China, received a lot of attention from a substantial price increase on the SEHK over the last few months. As a mid-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, could the stock still be trading at a relatively cheap price? Let’s examine Kingsoft’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.
Check out our latest analysis for Kingsoft
What’s the opportunity in Kingsoft?
Kingsoft appears to be overvalued according to my relative valuation model. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Kingsoft’s ratio of 45.02x is above its peer average of 13.44x, which suggests the stock is overvalued compared to the Software industry. If you like the stock, you may want to keep an eye out for a potential price decline in the future. Given that Kingsoft’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us another chance to buy in the future. This is based on its high beta, which is a good indicator for share price volatility.
Can we expect growth from Kingsoft?
Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company’s future expectations. Kingsoft’s earnings over the next few years are expected to double, indicating a very optimistic future ahead. This should lead to stronger cash flows, feeding into a higher share value.
What this means for you:
Are you a shareholder? It seems like the market has well and truly priced in 3888’s positive outlook, with shares trading above its fair value. However, this brings up another question – is now the right time to sell? If you believe 3888 should trade below its current price, selling high and buying it back up again when its price falls towards its real value can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping tabs on 3888 for some time, now may not be the best time to enter into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the positive outlook is encouraging for 3888, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.