$NVIDIA (NVDA.US)$$Tesla (TSLA.US)$ The usual comment about ...

$NVIDIA (NVDA.US)$ $Tesla (TSLA.US)$ The usual comment about P/E is that it doesn't apply to growth companies. This is true in some cases, but not all. For new companies growing revenue quickly, they might have a negative P/E, and still be a viable investment.

We remember when Tesla had a P/E over 1000. Its recent TTM P/E is 330, and its forward P/E is 120. A 120 multiple for a car company is still too high, but at least it shows that the company's earnings growth is taking the P/E down pretty rapidly. It's possible for a company to "grow" into their P/E.

NVDA is an interesting example. At 90 P/E and forward P/E of 60 it seems very overpriced. The bulls would argue that the company's growth will actually accelerate, making the P/E shrink at an even faster rate than it has been. So a lot comes down to the investor buying into that thesis or not. To me, its overvalued, and so is Tesla. But there is no doubt a lot of money has been made investing in both of them.

I do agree P/E is dismissed far too easily. It's useful to compare current P/E to historical P/E, and that's done a lot to figure out if the S&P 500 is currently overvalued or not (it is about 30 now and in the past few years, was often more like 19-20).

It works at the company level also. As a random example, JNJ has a P/E of 25. In past years it often traded at a P/E of 15-20. Doesn't mean its a bad investment, but it does indicate its not undervalued at this level.

TL;DR - for hypergrowth and negative EPS stocks, P/E isn't useful. For more mature companies with stable earnings, it can be a helpful metric to look at, along with others.