When you’re evaluating a stock, what’s the first metric you check to gauge its value?
If you’re like most investors, it’s probably the price-to-earnings (P/E) ratio.
It seems simple enough: the lower the P/E ratio, the better—right?
Not exactly.
The P/E ratio has its uses, but if you’re relying on it as your go-to valuation tool, you might be missing the bigger picture—and potentially overlooking some of the market’s best opportunities.
Today, we’ll break down this important investing lesson… which metrics to look at instead… and the perfect example of a high-P/E stock that investors would be crazy NOT to buy on any pullback.
What the P/E ratio measures… and how it can be misleading
Put simply, the P/E ratio measures how much investors are willing to pay for each dollar of a company’s earnings.
It’s calculated by dividing the current share price by the earnings per share (EPS).
So if a company earns $1 per share and its stock trades at $10, the P/E is 10x. That means investors are willing to pay $10 for every $1 of earnings the company generates annually.
The P/E ratio is a popular shortcut for assessing valuation because it’s easy to calculate… it can be used to compare stocks across sectors or the overall market… and it provides a rough gauge of expectations.
The problem is that it can be easy to misinterpret (or oversimplify).
Many investors view a high P/E ratio as a signal that a stock is expensive or even overvalued—and vice versa.
But a low P/E ratio doesn’t automatically mean a stock is cheap. On the flip side, a high P/E doesn’t always mean “overvalued.”
A higher P/E often implies the market expects stronger future growth; a lower P/E can signal lower growth—or problems under the surface. It might mean the company’s earnings are declining or stagnant.
A stock trading at a P/E of 9x could be a value trap if its earnings are collapsing.
In other words, a low P/E with no growth is like a clearance tag on a product no one wants.
The real metrics you should watch: earnings growth and TAM
If you want to identify winning stocks, especially in today’s market, you need to look at how fast the company is growing its earnings and its total addressable market (TAM).
A company growing its bottom line year over year (or better yet, quarter over quarter) can compound value and scale margins.
Meanwhile, the total addressable market (TAM) is the total amount of money a company could make if it captured 100% of demand for its product or service in a specific market. Obviously, the bigger the TAM, the more potential revenue.
These stocks might trade at a high P/E ratio—but here’s the thing: These companies deserve to trade at a premium multiple.
Remember: The P/E ratio is a reflection of the market’s expectations for the stock, and how much investors are willing to pay for its earnings.
Put simply, if you only buy stocks with low P/E ratios, you’d never own a growth stock.
Let’s look at the perfect example.
Palantir Technologies Inc. (PLTR) builds powerful software platforms that help governments and businesses analyze massive amounts of data to make better decisions.
Its tools are used for everything from tracking terrorist threats to optimizing supply chains. Think of it as a data brain that helps organizations spot patterns, solve problems, and act faster.
According to Capital IQ, the company currently trades at a P/E ratio of 190x. For context, the market trades at 20x.
Looking at that number alone might send you running…
But if you actually look at the growth and TAM, that valuation starts to make sense.
Palantir is expanding both its government and commercial business segments. It’s already at the center of defense tech and Big Data analytics. Now, it’s positioning itself as a central player in AI infrastructure.
As markets grow and evolve, so can a company’s TAM. Right now, PLTR has a TAM of well over $100 billion—and that’s being conservative. For perspective, PLTR will generate around $3.9 billion in revenue in 2025.
And more importantly, its earnings are growing exponentially.
On May 6, PLTR reported strong first-quarter (Q1) earnings and raised revenue guidance for fiscal year (FY) 2025 to $3.89–$3.90 billion vs. $3.75 billion estimates.
What’s better, earnings per share (EPS) are expected to grow 41% in FY 2025. For perspective, the market is expected to grow EPS by 9% in 2025.
Based on this growth trajectory, the stock is actually cheap.
In fact, investors should consider this stock a buy on any pullback.
How to evaluate a stock’s true value
Next time you evaluate a stock, try this 4-step approach:
- Look at the earnings trend: Are earnings growing year over year? Quarter over quarter?
- Research the company’s total addressable market: How big is the potential customer base?
- Check the forward guidance: Are analysts expecting acceleration or deceleration in earnings growth?
- Understand the business moat: Is the company innovating or expanding into new markets (like Palantir is with AI)?
Tools like FactSet’s free weekly earnings insight reports are a goldmine for tracking market-wide earnings trends. Just Google “FactSet Earnings Insight PDF” and thank us later.
The bottom line: Growth deserves a premium
Markets are forward-looking. A company with fast-growing earnings and a massive TAM is usually rewarded—even if it looks “expensive” on paper. Meanwhile, companies with low P/Es are often cheap for a reason: Their growth is stagnant.
So, forget the P/E ratio as your starting point. It’s just one piece of the puzzle—and not the most important one. Focus on growth and TAM, and you’ll be ahead of 90% of investors out there.
Palantir is just one example. There are plenty more if you know where to look. For more investing education, market insights, and stock analysis, join Wall Street Unplugged Premium.
