How and why do we compare a stock to its peers?


Stock vs Peers

The peers check allows you to compare a company’s valuation multiple to a group of similar companies. As a reminder, the valuation multiple, which is either price-to-earnings, price-to-sales, or price-to-book is chosen based on a company's attributes, such as its profitability or business model. You can find out more details in our Key Valuation metric video. 

The peers that will be displayed on the chart here are selected based on an algorithm we’ve created. It filters down to find companies with similar attributes to the stock you’re looking at, such as industry, market cap, growth and even user search patterns. 

The check for this section is whether the valuation multiple is above or below the average of those peers selected. The average is the yellow line between the green and red. A lower multiple usually means better value, so if the multiple is below the average, the company passes the check, and if it is above the average, the company fails the check. You can see this illustrated by the green and red areas on the graph. If a stock passes this check, 1 point is added to its snowflake valuation score, and if it fails this check, no point is added.

On this graph, the company you are analysing will be highlighted with blue. Once you get familiar with how the valuation multiples compare among the stock you’re looking at and its peers, it’s important to consider each company’s expected earnings growth rate.  This is because the expected earnings growth rate can provide context to the valuation, to see if the valuation multiple, be it high or low, is justified. 

You can see how fast a company is estimated to grow its earnings on the right hand side of the chart under the “forecasted annual earnings growth” column. If a company is expected to grow its earnings faster than others, it might be valued higher by investors because they’re willing to pay more today for higher earnings growth going forward. And usually, if a company has lower earnings growth expectations, you’d expect to see it trading at a lower valuation multiple today because investors don’t want to pay a high multiple for lower growth. 

If you want to see how the PE is affected by a year of earnings growth, you can use the ‘forward PE toggle’ below the chart for those companies that have analysts covering the stock.

By using this relative valuation technique, we get great context as to how the stock we’re looking at compares to similar companies, and if there’s any potential opportunities or risks in regards to under or overvaluation.



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