On Wall Street, determining value is the name of the game. However, a stock's price is only one component of that stock's value. Since companies have different amounts of profits, sales, and shares outstanding, comparing prices alone doesn't provide much information on how cheap or expensive a stock truly is.
To compare stocks on an apples-to-apples basis, you have to examine the relationship between their share prices and other fundamentals like sales, earnings, or growth.
With that in mind, let's have a closer look at 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 see how their valuations compare to one another.
Image source: Getty Images.
How to measure value
There are many different ways to determine a stock's value, but let's focus on the PEG ratio . This ratio is a valuation measure that compares three values:
- stock price
- earnings-per-share
- expected earnings-per-share growth
In a nutshell, the PEG ratio aims to answer this question: How expensive is a stock relative to its earnings growth? That's because, in essence, the PEG ratio is very similar to another ratio, the price-to-earnings (P/E) ratio . The only difference between the two is that the PEG ratio divides the P/E ratio by the stock's expected earnings growth rate (hence the 'G' in PEG).
By doing this, the PEG ratio accounts for expected earnings growth, which is important because investors are often willing to pay a premium for stocks that are growing their profits.
At any rate, t he higher the PEG ratio, the more expensive the stock is relative to how quickly it is growing its earnings.
Thirty years ago, a PEG ratio of 1.0 was seen as fair value, although that figure has risen for a variety of factors. Nowadays, the average PEG ratio is closer to 1.5, although the the variance is notable across sectors.
For example, some energy companies sport PEG ratios well below 1.0. Exxon Mobil 's current PEG ratio is 0.24. The same goes for many other value stocks. Southern Co , a large utility company, has a PEG ratio of 0.44.
However, stocks in faster-growing sectors tend to have much higher PEG ratios. Broadcom , for example, has a PEG ratio of 1.5; Adobe has a PEG ratio of 8.6.
In short, it's best to compare PEG ratios within sectors, or at least among peers.
With that in mind, let's examine the Magnificent Seven stocks.
How the Magnificent Seven stack up
Based on the PEG ratio, this is how the Magnificent Seven compare.
AAPL PEG Ratio data by YCharts
First things first: Where's Tesla? Well, for two reasons, I've removed Tesla.
- Due to some wonky earnings results and projections, Tesla's current PEG ratio is over 70. That's not a true reflection of its average PEG ratio, which hovers closer to 2.5.
- Tesla is an auto manufacturer, while the rest of the Magnificent Seven stocks are tech stocks; we'll set it to the side as I'd like to make compare stocks within the tech sector.
So, what stands out? To me, Apple, and to a lesser extent, Microsoft, jump off the page.
Now, that may come as a surprise, but it gels with my opinion on Apple. Simply put, the company isn't growing very fast. That means investors are increasingly paying more for the same or similar amounts of earnings from the company. Compare Apple's growth to that of a company like Nvidia, whose earnings growth is off the chart. In its most recent quarter (the three months ending on July 28, 2024), Nvidia grew its earnings by 168%. Apple grew them by 8%. In short, Apple simply isn't the growth machine it once was.
Then there's Microsoft. Granted, it's closer to the typical PEG ratio, but compared to its peers, Microsoft is quite expensive. That means the stock is probably somewhere between fairly valued and overvalued, at least based on the PEG ratio. While I'm certainly not bearish on Microsoft, this valuation may indicate it's time to ease off on my bullish attitude toward the stock.
As for the other stocks, their low PEG ratios (all of them are below 0.5) offer a green light to investors. I remain bullish on each of those stocks for the long term, and the PEG ratio bolsters my view that those stocks remain undervalued given the expectations around their earnings growth.
Now, for some caveats. PEG ratios are not the end all and be all when it comes to valuation metrics. Indeed, since they rely on earnings estimates (from Wall Street analysts) it could be argued that they are speculative in nature. Other valuation metrics, such as P/E ratios and price-to-sales (P/S) ratios , use reported data as opposed to forecasted data. That may make those ratios more appealing to some investors.
Nevertheless, the PEG ratio is a useful tool that investors should keep at hand. Based on current readings, Apple looks slightly overvalued, while Meta Platforms, Amazon, Alphabet, and Nvidia look to be bargains.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jake Lerch has positions in Adobe, Alphabet, Amazon, ExxonMobil, Nvidia, and Tesla. The Motley Fool has positions in and recommends Adobe, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy .
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