On Wall Street, the quest for value is a high-stakes game. Yet, a stock’s price alone is an incomplete measure of its true worth. With varying profits, sales, and shares outstanding, comparing prices offers only a glimpse of a stock’s economic prowess. To view stocks on equal footing, delving into the relationship between share prices and core fundamentals like earnings and growth is essential.
With a seasoned eye, we turn to the “Magnificent Seven” stocks — Nvidia (NASDAQ: NVDA), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), Meta Platforms (NASDAQ: META), and Tesla (NASDAQ: TSLA) — to uncover their relative valuations.
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Assessing Value
Various methods exist to ascertain a stock’s value, but let’s zero in on the PEG ratio. This metric juxtaposes the stock price against two key drivers:
- earnings-per-share
- expected earnings-per-share growth
In essence, the PEG ratio tackles this pondering: How pricey is a stock relative to its earnings growth potential? This ratio, akin to the price-to-earnings (P/E) ratio, factors in the stock’s anticipated earnings growth rate (enter the ‘G’ in PEG).
Simply put, the higher the PEG ratio, the steeper the stock’s cost relative to its earnings expansion. Three decades back, a PEG ratio of 1.0 was deemed just; over time, this notion has evolved. Nowadays, the norm hovers nearer to 1.5, though vast sectoral disparities persist.
For instance, many energy firms flaunt PEG ratios well below 1.0. Exxon Mobil boasts a PEG ratio of 0.24. Similarly, value stocks like Southern Co., a sizeable utility player, flaunt a PEG ratio of 0.44.
Meanwhile, swiftly growing sectors harbor much loftier PEG ratios. Broadcom stands at 1.5; Adobe looms at 8.6.
In essence, comparing PEG ratios within sectors, or at least among peers, proves most illuminating.
Keeping this in mind, let’s scrutinize the Magnificent Seven stocks.
A Closer Look at the Magnificent Seven
Let’s gauge the Magnificent Seven’s standings based on the PEG ratio.
AAPL PEG Ratio data by YCharts
First off, where’s Tesla? I’ve excluded Tesla for two reasons.
- Tesla’s PEG ratio currently exceeds 70 due to erratic earnings data, skewing a fair comparison where its average PEG ratio reclines closer to 2.5.
- Considering Tesla is an automaker whilst the others are tech giants, we place it aside, orienting our stock comparison within the tech sector.
So, what catches the eye? For me, Apple, and to a lesser extent, Microsoft, stand out.
Amid surprises, this aligns with my appraisal of Apple. Plainly put, the company’s growth isn’t pacing briskly. Consequently, investors shell out more for Apple’s earnings output, akin or inferior to prior levels. Compare Apple’s pace against Nvidia’s staggering earnings surge. In the latest quarter (ending July 28, 2024), Nvidia posted a 168% earnings spike versus Apple’s modest 8% upturn. Apple, candidly stated, isn’t the growth dynamo it once embodied.
As for Microsoft, although nearing the average PEG ratio, its cost relative to peers raises eyebrows. Presumably perched between fair and overvalued, the stock hints at a shift in investor sentiment. While not bearish on Microsoft, elevated valuations might nudge towards a moderated bullish stance.
The remaining stocks, boasting sub-0.5 PEG ratios, beckon green signals to investors. My optimism stands unwavering for these stocks long-term, with PEG ratios reinforcing their undervalued status amidst bullish earnings forecasts.
Yet, a word of caution. PEG ratios are but a piece of the puzzle in valuation metrics. With dependence on earnings predictions, they veer into speculative terrain. Alternative metrics like P/E ratios and price-to-sales (P/S) ratios, grounded in actual data, might allure certain investor factions.
Nonetheless, the PEG ratio remains a valuable gauge to retain. The present landscape hints at Apple leaning slightly pricy, whereas Meta…(text truncated)
Unveiling the Investment Prospects of Tech Giants
Assessing the Market Landscape
As the financial world navigates the tumultuous sea of investment opportunities, tech giants like Amazon, Alphabet, and Nvidia emerge as beacons of potential value for discerning investors.
Unpacking the Nvidia Investment Question
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Considering Investment Vistas
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Historically, these companies have illustrated resilience and adaptability in an ever-evolving tech landscape, propelling their stocks into the stratosphere of investor interest and financial prosperity.