"The explosion of interest in artificial intelligence (AI) has caused the valuations of many tech stocks to skyrocket. Palantir Technologies ( ), for example, trades at more than 170x forward earnings, Tesla ( NASDAQ:TSLA ) goes for 184x, and CrowdStrike ( NASDAQ:CRWD ) trades at 111x. These multiples reflect high expectations for AI-driven growth, but they also raise questions about sustainability."
"Forward earnings aren't the only way to value a stock, and perhaps not even the best way, particularly if their projected growth suggests high valuations. The price-to-earnings-to-growth (PEG) ratio, which divides the forward P/E by the expected annual EPS growth rate (expressed as a percentage), provides a more effective lens for evaluating growth stocks. A PEG below 1 often signals undervaluation relative to growth prospects."
"Nvidia (NVDA) Nvidia ( NASDAQ:NVDA ) dominates the AI accelerator market with its GPUs powering most large-scale training and inference workloads. Despite a trailing P/E above 50, its forward P/E sits at a more reasonable 27x, which yields a very attractive PEG ratio of roughly 0.8 - well below 1, making it one of the cheapest ways to bet on continued AI expansion."
Interest in AI has driven tech stock valuations to very high forward P/E multiples, exemplified by Palantir, Tesla, and CrowdStrike. Forward P/E can mislead when projected growth expectations are embedded in prices. The PEG ratio, calculated as forward P/E divided by expected annual EPS growth percentage, offers a clearer comparison for growth stocks; a PEG below 1 can indicate undervaluation versus growth prospects. Nvidia leads the AI accelerator market with GPUs and a dominant software moat; its forward P/E of 27x implies a PEG of roughly 0.8, supported by strong data center revenue and robust demand for Blackwell GPUs.
Read at 24/7 Wall St.
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