How expensive is Magnificent Seven stock right now?

On Wall Street, driving value is the name of the game. However, the price of a stock is only one component of the value of that stock. Because companies have different amounts of earnings, sales, and shares outstanding, just comparing prices doesn’t provide much information about how cheap or expensive a stock really is.

To compare stocks on an apples-to-apples basis, you need to examine the relationship between their stock prices and other fundamentals such as sales, earnings or growth.

With that in mind, let’s take a closer look at the actions of the “Magnificent Seven” — Nvidia (NVDA 1.53%), Apple (AAPL -0.36%), Microsoft (MSFT 2.09%), Amazon (AMZN 2.37%), Alphabet (GOOG 0.31%) (GOOGL -0.03%), Meta platform (META)and adze (TSLA 4.58%) — to see how their ratings compare to each other.

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 an evaluation measure that compares three values:

• share price
• earnings per share
• estimated earnings per share growth

In short, 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).

In doing so, the PEG ratio takes into account expected earnings growth, which is important because investors are often willing to pay a premium for stocks that increase their earnings.

In any case, tThe higher the PEG ratio, the more expensive the stock is relative to how fast it is growing its earnings.

Thirty years ago, a PEG ratio of 1.0 was seen as fair value, although this figure has increased for a variety of factors. Currently, the average PEG ratio is closer to 1.5, although the variance is notable across sectors.

For example, some energy companies have PEG ratios well below 1.0. Exxon MobileIts current PEG ratio is 0.24. The same is true for many other value stocks. Southern Coa large utility company, has a PEG ratio of 0.44.

However, stocks in faster-growing sectors tend to have much higher PEG ratios. Broadcomfor example, it has a PEG ratio of 1.5; Adobe it 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 actions of the Magnificent Seven.

How the Magnificent Seven Stack Up

Based on the PEG ratio, this is how Magnificent Seven compares.

AAPL PEG Ratio Data by YCharts

First things first: Where is Tesla? Well, for two reasons, I eliminated Tesla.

1. Due to lackluster results and earnings projections, Tesla’s current PEG ratio is over 70. This is not a true reflection of its average PEG ratio, which is closer to 2.5.
2. Tesla is an automaker, while the rest of the Magnificent Seven stocks are technology stocks; we’ll leave that aside because I’d like to compare stocks in the tech sector.

So what stands out? For me, Apple, and to a lesser extent Microsoft, jump off the page.

Now, this may come as a surprise, but it fits my opinion of Apple. The company is simply not growing very fast. This means that investors are paying more and more for identical 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 charts. In its most recent quarter (the three months ended July 28, 2024), Nvidia grew its earnings by 168%. Apple increased them by 8%. In short, Apple just 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 fair and overvalued, at least based on the PEG ratio. While I’m certainly not bearish on Microsoft, this valuation may indicate that it’s time to ease out of my bullish stance on the stock.

As for the other stocks, their low PEG ratios (all are below 0.5) give investors the green light. I remain bullish on each of these stocks over the long term, and the PEG ratio reinforces my view that those stocks remain undervalued given their earnings growth expectations.

Now for some caveats. PEG ratios are not the be all and end all when it comes to valuations. Indeed, since they are based on earnings estimates (from Wall Street analysts), one could argue that they are speculative in nature. Other valuation metrics, such as the P/E ratio and price-to-sales (P/S) ratio, use reported data as opposed to forecasted data. This may make these reports more attractive to some investors.

However, the PEG ratio is a useful tool that investors should keep close at hand. Based on current readings, Apple looks slightly overvalued, while Meta, Amazon, Alphabet and Nvidia appear to be bargains.