In this segment of "Semiconductor Revolution" from Motley Fool Live, recorded on Jan. 20, Fool contributors Jose Najarro, Will Healy, and Billy Duberstein answer a question about what valuation methods they use for stocks in the semiconductor industry.
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Jose Najarro: What are suitable valuation metrics for this industry is it price-of-sales, price-to-earnings, EV to EBITDA, or price to free cash flow. Billy, well, would you guys want to, I'm pretty sure it's different depending on where the stage of the company. But if you guys want to share your thoughts, Will, I'll let you go first here. Do you have any preferred method or when to choose what kind of valuation metric you look at?
Will Healy: I look at the PEG ratio because different companies have different growth rates and you don't want to just go on P/E. I'm about to discuss Intel (INTC 1.30%), Intel has a 10 P/E ratio, but there's a very good reason that's a 10 P/E too. Whereas Nvidia (NVDA 1.95%) I think is like in the 80s, at least the last time I checked it was and that's because the growth is phenomenal. I look at the PEG ratio.
Billy Duberstein: That's price-earnings to growth.
Duberstein: That might be a little bit difficult with a company like this just because the growth rate moves around so much. Since it's a cyclical company, but it's a growth cyclical, so it might be helpful to go back through the last cycle and maybe take the average earnings, maybe like the past five years and see how that's trending. I think P/E ratio works for a stock like this too. It's premature, generates positive earnings, and you just got to figure out if there's over-earning or under-earning and what's the normalized level of earnings and the long-term growth rate.