Growth stocks can be difficult to value and deciding whether the company is trading at a fair price can be confusing. Buying a stock when it is overvalued reduces your margin of safety and will result in weaker future returns. We want to avoid this, so how do we know whether a fast-growing company is at a good valuation or overvalued based on hype? Today we will be answering this question in order to give you more confidence and better future gains. Welcome to Stock Investment Analysis where we focus on learning more about investing and the stock market. Make sure you like and subscribe so you never miss a future video and help get this video out to more people who are interested.

Before I explain how to value a growth company, I want to first explain what I mean when I say “growth company.” A growth company is any company that is growing rapidly in comparison to other companies in its field or the market in general. The companies we will be discussing today in our analysis generally have growth rates over 15% per year which is close to double where much of the market has historically grown. You may already know something about valuation, and I hope you are familiar with common valuation metrics like the price to earnings ratio, price to sales ratio, price to free cash flow ratio, and price to book ratio. If you are not, please watch my videos on that, I have an entire playlist on the basics of valuation. While those valuation metrics work well for value stocks or slower growing companies, they can fall short when assessing a rapidly growing one.

In this video, I demonstrate how to use the Price/Earnings-to-Growth ratio or PEG ratio, Fast Graphs, and Forward Price/Earnings ratio or Forward PE ratio. We also discuss the growth story, the use of price to operating cash flow and price to EBITDA. EBITDA stands for earnings before interest, taxes, depreciation, and amortization. The information in the video is demonstrated with a brief analysis of the valuation of Facebook (FB) and Amazon (AMZN).

What do you use to value a growth stock? Please leave your thoughts in the comments below. I look forward to hearing from you and learning from you. If you are interested in the stock market, growth stocks, or fundamental analysis, make sure to subscribe because I will be creating new videos for you every week. As always, good luck with your investing.

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DISCLOSURE: I am long FB and AMZN.

DISCLAIMER: All information and data on this YouTube Channel is solely for entertainment purposes. The information herein is based solely on my personal opinion and experience. All investments hold inherent risk, and the information provided on this YouTube Channel should not be interpreted as guidance, recommendations, offers, advice, or suggestions. Any ideas and strategies discussed on this channel should not be implemented without first considering your financial and personal circumstances or without consulting a financial professional.

Used in this video:
www.Fastgraphs.com
www.fidelity.com
www.macrotrends.net
www.finance.yahoo.com
www.gurufocus.com

images from: Nattanan Kanchanaprat, Steve Buissinne, S. Hermann & F. Richter, ADC, Ulrike Leone, and Gerd Altmann.