PEG Ratio is a better metric than PE

Nvidia $NVIDIA Corp(NVDA)$ just reported earnings on Wednesday after close. At a glance, FY25 Q2 non-GAAP EPS $0.68 beats by $0.04, revenue $30.04B (+122.4%) beats by $1.31B. Data Center revenue $26.3B, up 154% from year ago & 16% from Q1. Q3 guidance revenue $32.5B vs expect $31.75B. Initiates $50B buyback. 

Stock falls more than 6.8%, which shows that marlets are always behaving irrationally.

Hence I would like to highlight an important metric that is overlooked.

Price to Earnings Growth Ratio

Oftentimes, investors look at the Price to Earnings ratio of a stock and think that the stock is expensive.

NVDA metrics from Finviz

One good source I use for researchIng stocks is looking at Finviz, and search the stock ticker symbol. In Nvidia's case, it's P/E ratio is 73.48x earnings, however the PEG ratio is highly attractive at 1.59 times.

The PEG ratio, or Price/Earnings to Growth ratio, is a valuation metric that helps investors determine the relative value of a stock while considering the company’s expected earnings growth. It is an extension of the Price/Earnings (P/E) ratio, which only looks at a company’s current earnings without considering future growth.

The formula for the PEG ratio is:

PEG ratio = P/E divided by Earnings Growth Rate

Peter Lynch's preferred metric

The PEG ratio is closely associated with Peter Lynch, a legendary investor and former manager of the Fidelity Magellan Fund. Lynch popularized the use of the PEG ratio in his investment strategy, emphasizing its importance in evaluating growth stocks.

Peter Lynch’s Approach to the PEG Ratio:

• Growth at a Reasonable Price (GARP): Lynch’s investment philosophy focused on finding companies with solid growth prospects that were still reasonably priced. The PEG ratio became a key tool for this approach.

• Valuation Perspective: Lynch argued that the P/E ratio alone was insufficient for assessing whether a stock was a good investment. By incorporating the growth rate of a company’s earnings, the PEG ratio provided a more balanced view of a stock’s valuation.

• Rule of Thumb: Peter Lynch famously suggested that a PEG ratio of around 1.0 is ideal, as it indicates that the stock’s price is in line with its growth prospects. He considered stocks with a PEG ratio below 1.0 to be potentially undervalued, making them attractive investment opportunities.

Example:

Lynch would prefer a company with a P/E ratio of 20 and an expected earnings growth rate of 20% (PEG = 1) over a company with a P/E ratio of 10 but a growth rate of only 5% (PEG = 2), even though the first company has a higher P/E ratio.

Lynch’s emphasis on the PEG ratio helped popularize its use among individual investors as a way to identify growth stocks that are trading at reasonable prices.

Forward P/E

Another important metric to consider is the forward Price to Earnings, which is the price divided by expected earnings per share. It might provide some insight on the growth of the company.

Here are some important ratios that I have compiled from Finviz:

$Apple(AAPL)$