Unlocking High-Growth Potential: Why Ignoring PE PEG is Key in Tech Stock Investing
It’s hard not to be blown away by their revenue, profit, cashflow from operations graphed over the past five years:
A financial performance for the ages, and they look set to keep it up.
Unfortunately for new investors, their market cap is even more insane, giving them a crazy PE ratio of 73.
I agree people may have missed the boat but for that PE ratio i wouldn’t focus too much on it as PE is calculated using 1 year of past data. It fails spectacularly in providing a valuation when there’s extreme YoY growth which there is here.
See the PE chart of Nvidia here and notice the large step changes everytime a quarterly report comes out: https://ycharts.com/companies/NVDA/pe_ratio . As each quarter where they had <1/10th the earnings is pushed out of the PE calculation they have a big step change.
Their forward PE is 25.32x right now. They have an expected 8% quarterly growth forecast. The FAANG have PE’s higher than that and much lower growth. Really on fundamentals of PEG (PE and growth) Nvidia is pretty good value. But… There’s huge risk here. Will they continue or will a competitor emerge? Can they rely on chips from Taiwan? etc.
So the investor story isn’t that they have a crazy PE. They honestly don’t. The investor story is that fundamentals for Nvidia look quite good but there’s also risks looming.
All good points.
I guess PE is better for steady-state businesses like utilities. But even with PEG, $NVDA is quite high — I get 16, but I much prefer this to be below 1.
None of this means they’re not a good buy, just that it would’ve been really fantastic to already be an owner.
I couldn’t find a consistent definition for it so I used the past five years. That’s another factor that would weigh against fast-growing tech companies.
Maybe the best portfolio would be one part proven, stable value investments picked using measures like PE and PEG, and one part tech companies that are chosen for future profit potential, which you can’t really measure or forecast so much as make an educated guess.