Introduction

If you're trying to determine whether a company's stock is expensive, cheap, or fairly valued, the PEG (price earnings to growth) ratio is one of the best ratios to look at.

The PEG Ratio

Instead of just looking at price-to-earnings, the PEG ratio also factors in the growth rate of the company, which is crucial in understanding if something is reasonably valued or not. Put simply, you take the price/earnings ratio and divide it by the earnings growth.

• A PEG ratio of under 1 means that the market is not fully accounting for the company’s growth potential and, as such, the stock is undervalued relative to its growth rate; 
• a ratio slightly above 1 is considered fairly valued; and
• a stock with a higher PEG ratio than 1.0 is considered overvalued.

While there are different ways to calculate the PEG ratio the most common way is to divide the estimated price earnings per share for the next year by the estimated EPS growth for the next 3 or 5 years.

In Summary

The PEG ratio is one of the most useful ways to quickly evaluate the stock price of a company that is still growing so, if you can find a stock whose price-to-earnings ratio is lower than its revenue or earnings growth rate (PEG under 1), then you are likely to have an undervalued investment on your hands.

Of the 65 AI stocks that are included in the various munKNEE portfolios, 20 have negative price earning ratios and, as such, can not provide PEG ratios. That leaves 45, of which only 3 have PEG ratios of less than 1.0 (i.e., are undervalued) and 4 have PEG ratios between 1.0 and 1.2 (i.e., are fairly valued). They are presented, in descending order, along with their market capitalizations, AI category, and any recent pertinent news, analyses or commentary:

1. Intel Corporation (INTC): PEG ratio of 0.4
   • Market Capitalization: $140B
   • AI Category:  Integrated Semiconductor Manufacturers (IDMs) design, manufacture, and sell their own semiconductor products to allow them to control the entire production process, from design to fabrication, resulting in greater efficiency and quality control.
   • Latest News, Analyses and Commentary:
     • Intel is the smarter investment as Nvidia peaks. Here’s why
2. Advanced Micro Devices (AMD): PEG ratio of 0.7
   • Market Capitalization: $245B
   • AI Category: Fabless Semiconductor companies design and sell hardware devices and semiconductor chips while outsourcing their fabrication (or fab) to a specialized manufacturer
   • Latest News, Analyses and Commentary:
     • AMD Collaborates With Samsung Electro-Mechanics to Supply High-Performance Substrates for Hyperscale Data Center Computing
3. Zscaler (ZS): PEG ratio of 0.9
   • Market Capitalization: $28B
   • AI Category: Cyber Security companies provide security solutions to protect networks, systems and other digital infrastructure from malicious attacks
   • Latest News, Analyses and Commentary:
     • The CrowdStrike Debacle Caused Our CyberSecurity Portfolio To Decline By 7%
4. Palo Alto Networks (PANW): PEG ratio of 1.1
   • Market Capitalization: $107B
   • AI Category: Cyber Security
   • Latest News, Analyses and Commentary:
     • Palo Alto, CrowdStrike, Zscaler 'Will Only Get Bigger' Says Expert: Cybersecurity Market Projected To Hit $2 Trillion By 2030
5. Micron Technology (MU): Peg ratio of 1.1
   • Market Capitalization: $127B
   • AI Category: IDM
   • Latest News, Analyses and Commentary:
     • Micron Unveils Industry's Fastest 2230 Gen4 Consumer SSD to Accelerate Handheld Gaming, Ultrathin Laptops and Mini PCs
6. Dogdata (DDOG): PEG ratio of 1.2
   • Market Capitalization: $40B
   • AI Category: Cloud Computing SaaS companies provide ready-to-use software for users to run from their own web browser
   • Latest News, Analyses and Commentary:
     • Why Datadog's newest bull says its stock is poised to rally
7. United Microelectronics Corporation (UMC): PEG ratio of 1.2
   • Market Capitalization: $20B
   • AI Category: Semiconductor Foundries concentrate all their efforts in the manufacturing of chips based on designs provided by other semiconductor companies
   • Latest News, Analyses and Commentary:
     • Are Investors Undervaluing United Microelectronics Right Now?

Please keep in mind that PEG ratios are ratios of the current stock prices of the day to the forecast of earnings estimates of the company at a future date (usually either in 1 year, 3 years, or 5 years time) and, as such, PEG ratios are flexible and will vary daily as the company's stock price fluctuates, increasing as the stock price rises and decreasing as the stock price falls.

Conclusion

Even though the PEG ratio is more useful than most others, it is still just a very simple mathematical formula and can not be used on its own to determine whether an investment is good or bad. You also need to look at a company's balance sheet, debt burden, and cash flow, or other valuation metrics that use the income statement and such information can be found here to help you in doing your due diligence on those low PEG ratio stocks of interest. It's also important to understand things like a company's competitive advantage and its addressable market.

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