$Amazon.com(AMZN)$ $Palantir Technologies Inc.(PLTR)$ $Hims & Hers Health Inc.(HIMS)$
Have You Ever Skipped a Stock Because It Looked Overvalued?
Have you ever passed on a stock like Amazon, Him & Hers, Palantir, SoFi, or any other growth company just because it seemed too expensive? Maybe it was trading at 80, 100, or even 120 times earnings, and you dismissed it as overvalued—only to look back a few years later and see the stock continuing to climb?
Even as these companies remain "overvalued," trading at high multiples like 60, 70, or 80 times earnings, their stock prices keep rising. This leads to two common conclusions:
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The Bubble Theory – Many traditional value investors assume it's all hype. They believe these stocks are in a massive bubble, just like the dot-com era of 2001. According to this view, the market is irrational, and eventually, these stocks will crash, wiping out investors.
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The Perspective Shift – But what if these stocks were truly overhyped, wouldn’t they have crashed already? If it were just speculation, wouldn't the market have corrected them by now? Maybe the problem isn’t the market—maybe it's our approach to valuation.
This was a realization I had years ago after skipping countless high-growth stocks. For the longest time, I wouldn’t touch anything above a 20 P/E ratio. I strictly followed the principles from The Intelligent Investor and Margin of Safety by Seth Klarman, focusing only on classic value stocks. But over time, I learned a hard lesson: I wasn’t avoiding bad investments—I was missing out on some of the biggest opportunities.
And that’s why I’m writing this—to share what I learned. I know this perspective will get mixed reactions, but if this article helps open your mind, all I ask is that you hit the like button and share your thoughts in the comments.
The Biggest Mistake Value Investors Make
Traditional value investors make one major mistake: they apply the same valuation method to every company. They use a discounted cash flow (DCF) model for every stock, assuming there's a one-size-fits-all approach to finding fair value. But every company is different. You can’t value an oil company, a gold miner, a dividend stock, and a high-growth tech company the same way. Investing isn’t that simple.
Understanding a Company's Growth Stage
One of the key reasons why value investors misprice growth stocks is that they don’t differentiate between business stages.
A mature company in stage five of its capital cycle—one that’s doing buybacks, paying dividends, and returning capital to shareholders—is relatively easy to value. These businesses have stable earnings, low debt, and predictable cash flows. A low P/E ratio often signals a good buying opportunity.
But a growth company in stage two or three is entirely different. These businesses reinvest heavily in themselves—building new products, expanding their market, strengthening their brand. They may have high stock-based compensation, share dilution, and even debt. Their P/E ratios can be sky-high (80x, 100x, or more), but that doesn’t necessarily mean they’re overvalued.
A common mistake is applying the same valuation model to a mature company (like Pepsi) and a high-growth company (like Amazon in its early years).
Why Growth Companies Look Expensive (But Might Not Be)
The reason a growth company’s P/E is high is simple: it’s reinvesting aggressively. These companies aren’t focused on maximizing short-term profits; they’re focused on long-term dominance.
Take SoFi, for example—they’re spending on branding with SoFi Stadium, growing their user base, and establishing themselves as a household name. Similarly, Him & Hers is pouring money into marketing and expansion. If these companies were paying dividends or doing buybacks instead, that would be a red flag—it would mean they don’t see opportunities to reinvest in their own growth.
This is why evaluating these businesses requires a different mindset. Instead of looking at just P/E ratios or doing a DCF, we need to assess their growth potential, competitive advantage, and reinvestment strategy.
Understanding Share Dilution and the Growth Cycle
A common mistake investors make is looking at the past five years of a company's share dilution and assuming it will continue indefinitely. But if a company turns profitable, you need to shift your perspective and think about how the next five years will look. Just because a company was dilutive in the past doesn’t mean it will be equally dilutive in the future.
Many of the companies investors dismiss today—whether it's SoFi, Him & Hers, or others—are at an early stage in their business cycle. If you go back in time, even companies like Pepsi and McDonald’s were once in the same position. They weren’t paying dividends early on, and they didn’t have an obvious competitive advantage (or "moat") at first.
People often say, “It’s just a website” when referring to companies like Him & Hers or Booking.com. But Booking.com is just a website—and yet, the stock has performed exceptionally well. The same was once said about Amazon, which was initially dismissed as “just an online bookstore.” The key point is that these companies are actively building their moat. If you wait until the moat is clearly visible, you've already missed the best investment opportunity.
This is a major mistake—valuing an early-stage company the same way you would a mature, established company.
Amazon: A Case Study in Growth vs. Maturity
Amazon has almost always appeared overvalued. Even today, it trades at 51 times trailing earnings. At certain points in its history, Amazon traded at 170x, 200x, or even 86x earnings. The company's average P/E ratio has been around 69x, consistently making it seem expensive.
But why does Amazon always look expensive? Because it prioritizes reinvesting in its own growth. Instead of distributing profits to shareholders through buybacks or dividends, Amazon pours money back into expanding its business, strengthening its moat, and securing long-term dominance.
How to Value Growth Stocks
If P/E ratios don’t work, how do you value a growth stock? Here are two key approaches:
Price-to-Earnings Growth (PEG) Ratio Compare a company’s P/E ratio to its earnings growth rate. If a stock trades at 50x earnings but is growing earnings at 50% per year, its PEG ratio is 1—a sign it may be fairly valued.
Total Addressable Market (TAM) Approach Estimate the company’s potential market size and how much market share it could capture. For example, the telehealth industry is projected to reach $460 billion by 2033. If Him & Hers captures just 10% of that market, its revenue could be $46 billion. Using a conservative 2x sales multiple, this suggests a potential market cap of $92 billion—far higher than its current valuation.
Take 2015 as an example:
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Amazon generated $35 billion in gross profits.
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Of that, $12.5 billion went to research and development (R&D).
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The company reported a net income of just $596 million, resulting in an 80x P/E ratio.
Now, imagine Amazon had cut its R&D spending by just 10-15%. Its P/E ratio would have dropped from 100x to 50x overnight. The company chose to appear expensive because it was investing in its own growth.
A similar pattern emerged in 2018:
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Amazon made $93 billion in gross profit.
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$29 billion went to R&D.
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Net income was only $10 billion.
If Amazon had slashed its R&D budget in half, its P/E would have dropped from 50x to 25x, making it look far more attractive to traditional value investors. But that would have come at the cost of long-term growth.
This is why you can’t evaluate high-growth companies using simple P/E ratios or traditional valuation metrics. Amazon has always looked expensive—because it reinvests in itself rather than maximizing short-term profitability.
Comparing Growth Companies to Mature Companies
Now, let’s compare Amazon to a mature company like Pepsi. Pepsi is a fantastic business, but it’s in a completely different stage of the business cycle.
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Pepsi doesn’t need to reinvent itself.
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It doesn’t need to develop new technology or expand into entirely new markets.
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Its main strategy is raising prices and maintaining market share.
This is why Pepsi allocates a tiny fraction of its revenue to R&D:
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Out of $50 billion in gross profits, only $813 million went to R&D.
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This left $9.5 billion in net income.
Now, imagine if Amazon had reached full maturity by 2018 and cut its R&D spending from $28 billion to just $1 billion. Its net income would have skyrocketed, making its P/E ratio drop to 17x or 18x—suddenly appearing like a classic value investment.
How Do You Value a Growth Stock?
Valuing a growth company is one of the hardest challenges in investing. If you can't rely on traditional metrics like the P/E ratio, how do you determine its worth—especially when the company has just turned profitable?
The truth is, growth stock valuation is never straightforward. A lot of it involves speculation, but speculation is inherent in all investing. Even discounted cash flow (DCF) models are based on assumptions about the future. In the end, everything in investing involves some level of speculation.
That being said, there are two main ways to approach valuing a growth company:
Price Relative to Growth (PEG Ratio)
One effective method is to compare the stock’s price to its growth rate. This is known as the Price-to-Earnings Growth (PEG) ratio.
For example, if a company is trading at 50 times earnings but is growing earnings per share by 50% annually, its PEG ratio is 1.0—which can be considered very cheap if the company sustains this growth.
A real-world example: When I first bought Hims & Hers (HIMS) in 2023, it was trading at less than half its PEG ratio, making it an attractive investment based on its growth potential.
Total Addressable Market (TAM) Approach
Another way to value a growth stock is to estimate its total addressable market (TAM) and project how much market share the company can realistically capture.
This approach worked well for valuing Tesla in its early days. If you looked at the potential size of the electric vehicle market and estimated that Tesla could capture even 10% of it, you could then project its future revenue and profitability.
A more recent example is Hims & Hers (HIMS):
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The telehealth market is expected to reach $460 billion by 2033.
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If HIMS captures just 10% of this market, that translates to $46 billion in revenue.
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Using a conservative 2x sales multiple (many companies trade at 5-10x sales), this would imply a $92 billion market cap.
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Compared to its current market cap of $8.5 billion, this suggests massive upside potential.
Many investors dismiss this as speculation, but projecting market potential is a fundamental part of investing in growth stocks.
Why Valuing a Stock Is the Easy Part—The Hard Part Comes After
A lot of people focus solely on valuation, but the real challenge in investing isn’t just knowing what a stock is worth—it’s knowing:
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When to buy
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How much to buy (position sizing)
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When to add more
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When to sell
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When to cut your losses and move on
This is what separates great investors from the average ones.
The Risk-Reward Balance in Growth Investing
The downside of any stock investment is clear: You can lose 100% of your capital if the company fails.
But the upside in growth stocks? It can be life-changing.
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A well-picked stock can 10x, 20x, or even 50x over time.
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You don’t need to risk a lot to see massive returns.
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If a stock drops 50%, but you only allocated a small portion of your portfolio, the loss is manageable.
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But if you’re right, even a small position can turn into huge profits.
This is why position sizing is key when investing in growth stocks.
Conclusion
I hope this article opened your mind a bit and gave you a new perspective on how to value growth stocks. Early-stage companies reinvest aggressively in themselves, which is why their P/E ratios often look high. But instead of dismissing them as overvalued, you need to think ahead:
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What happens if they reach maturity?
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How much profit could they generate if they scaled back R&D spending?
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Are they building a moat that will lead to long-term dominance?
Understanding this difference is critical to spotting opportunities before they become obvious to everyone else.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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