Table of Contents:
Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.
Pre-req readings
Steps
First, find out what will the PS Ratio of the Stock be when it goes back to its All-Time High levels,
[Formula]: PS ratio when stock in on All-time high price = (All-time high price x Shares Outstanding) / LTM Revenue
Using Fortinet as an example, As of today, this value is 11.66
($81 x 763 mill) / 5.3 bill
Next, find out what is the stock's Lowest PS ratio since inception
In this case, Fortinet's PS ratio lowest value is 3.38X on 5 Feb 2010.
3. Find out the Highest value in the same duration.
in this case, it is 19.6
4. Obtain the Median value using both the Lowest & Highest values obtained above, using a = Median formula on a spreadsheet
The Median of Fortinet's PS ratio is 11.49 in this case.
5. Then compare both the
Median Value (11.49) with
the PS ratio of the stock (if it were to go back to its All-time high price) (11.66) [1]
Since the figure is rather close to the Median amount,
it is considered to be in a fairly attractive PS ratio level from this perspective.
Example of Companies with Attractive PS ratio
Highest PS ratio was 9X on 1 Sep 2021
Lowest was 4 on 3 Nov 2022
Therefore, this gives Google a Median PS ratio of 6.5.
Since Google's PS ratio will be 6.3 if their stock price goes back to All-Time High level ($155), (refer to the calculator attached here:
which is less than their Median amount,
Google's PS ratio is considered to be in an attractive range from this perspective.
Tesla
Highest PS ratio was 30X on 26 Jan 2021
Lowest was 1.373 on 3 June 2019.
Therefore, this gives Tesla a Median PS ratio of 15.7
Since Tesla's PS ratio will be 13.4 if their stock price goes back to All-Time High level ($407) today, which is less than their Median amount,
Tesla's PS ratio is considered to be in an attractive range from this perspective.
(Note): however, since Tesla's PS ratio was as high as 30X during its highest period,
if you would like to be more conservative, you could set the value to be 21X instead (refer to: this article here), doing so will bring the Median value down to 11.2 instead.
Example of Companies with un-Attractive PS ratio
Nvidia
Highest PS ratio was 45.8X on 18 Jul 2023
Lowest was 0.842 on 6 Aug 2002
Therefore, this gives NVIDIA a Median PS ratio of 23.3
Since Tesla's PS ratio will be 37.4 if their stock price goes back to All-Time High level ($927) today, which is significantly higher than their Median amount.
NVIDIA's PS ratio is considered to be in an overvalued range from this perspective.
Regardless of which, based on the findings here (Avoid Investing in Stocks with PS Ratios Above 21X (when stock is at all-time high level), any Stock which PS ratio exceeds 21X is considered to be an overvalued investment.
Conclusion
Finding undervalued stocks can be tricky. But the median PS ratio offers a helpful starting point. By comparing a stock's potential PS ratio at its peak price to its historical median, you can see if it might be a good deal. Remember, this is just one piece of the puzzle. Always do your own research before investing!
