One of the most common fundamental metrics that investors use to analyze stocks is the price-to-earnings (P/E) ratio. This ratio tells you how much you’re paying for $1 of a company’s profits. The formula is:
P/E ratio = price per share/earnings per share
In general, the lower the number, the better, but the ratio will change depending on the industry. For example, the P/E ratio for technology stocks will be higher than that of utilities stocks. That’s because many investors are willing to pay a higher share price for the expected growth that comes from investing in a sector that includes artificial intelligence, cybersecurity, cloud computing, and more.
Passive fund investors don’t think much about P/E ratios, but for individual stock investors, a stock’s P/E ratio is one of many factors to consider. But should you avoid a stock with a high P/E ratio? Not always. One question to consider is what the company’s growth outlook is. This is particularly true if you plan to hold the stock for a long time.
Palantir Has Multiple Near-Term Catalysts
Palantir Technologies Inc. (NYSE: PLTR) is a software company with an ontology that helps its customers use AI to make insightful decisions for their business. However, at the time of this writing, it has a forward P/E ratio of over 168x. Many analysts believe the stock, which is a favorite of individual (i.e., retail) investors, is due for a massive correction.
Since its last earnings report on August 5, PLTR stock has shot above $30 and is holding that value. One reason is that the company continues to receive new contracts in both its government and commercial business. In fact, Palantir was the recipient of the TITAN contract from the U.S. military which the government recently announced is expanding to a value of up to $1.5 billion between 2026 and 2031. Palantir won’t receive all of that revenue, but the revenue it does receive will build up the company’s bottom line.
And coming up in September, Palantir may be included in the S&P 500 index. If that happens, those concerns about institutional investors staying away from PLTR will end as fund managers will add PLTR stock to their funds.
Advanced Micro Devices Remains a Favorite to Put Pressure on NVIDIA
Like many chip stocks, Advanced Micro Devices (NASDAQ: AMD) wasn’t immune from the recent sell-off in the sector. From July 10 to August 7, AMD stock dropped about 30%, but after the company reported earnings on July 31, the stock is recovering, and despite a forward P/E ratio of around 58x, it may still be a good time to buy the stock.
In its last quarter, the company posted a 9% year-over-year (YoY) increase in revenue. A considerable chunk of that business is coming from data centers, which saw revenue increase by a record 115%. That growth points to strength in the company’s AI graphic processing units (GPUs). That's consistent with companies looking for an alternative to the AI GPUs offered by NVIDIA Corp. (NASDAQ: NVDA). AMD is also increasing its CPU market share and is taking that share from Intel Corp. (NASDAQ: INTC).
Plus, you shouldn’t quickly dismiss a company that saw its quarterly free cash flow (FCF) rise by 81% year-to-date. This gives the company the cash reserves that are needed to grow its business.
CAVA Group Is a Likely Beneficiary of the Chipotle C-Suite Move
With a forward P/E ratio of 285x, investors might think it’s insane to invest in CAVA Group Inc. (NYSE: CAVA). No matter how impressive the company’s growth has been, this is a restaurant stock at a time when it’s impossible to deny that the consumer is weakening.
However, CAVA Group is not your usual restaurant stock. The company’s Mediterranean-inspired menu is a hit among Gen-Z consumers who are looking for healthy, convenient dining options. Like one of its rivals, Chipotle Mexican Grill Inc. (NYSE: CMG), the company has a model that uses digital solutions to drive further growth.
The company’s growth is already impressive. It opened 14 stores in the first half of this year and reiterated plans to open approximately 50 stores this calendar year. And that’s the key. This is still a small company and has the opportunity to expand into markets where its food is still considered a novelty. With Chipotle stock likely to experience volatility as it transitions to a new CEO, CAVA Group may provide investors with a tasty alternative.
