2024-09-10 17:41:24 ET
Summary
- The Invesco QQQ trades at 26.89x forward earnings and 21.29x trailing cash flow. Although these ratios are high, they're still below most other large-cap growth ETFs.
- QQQ's valuation is at least partially justified, evidenced by its stronger growth, quality, momentum, and sentiment features. This analysis provides supporting fundamental metrics for this conclusion.
- Risks include downward-trending earnings surprises, which historically have accompanied recessions or value re-ratings, like in 2022. In particular, Nvidia's 5.66% surprise was the lowest since October 2022.
- QQQ has relied on only a few stocks to drive returns. It's an additional risk, but the grass isn't always greener on the other side. Alternative ETFs often sacrifice quality.
- In this balanced article, I will evaluate QQQ's fundamentals in depth, and shed some light on the different ways to assess an ETF's valuation.
Introduction
The Invesco QQQ Trust ETF ( QQQ ) has gained 142.12% over the last five years, easily outperforming broad-market benchmarks like the SPDR® S&P 500® ETF Trust ( SPY ) and prompting several analysts to declare it's time to sell.
However, I don't think it's that simple. First, some analysts misinterpret how data providers calculate valuation ratios for ETFs, which sadly leads to irrelevant apples-to-oranges comparisons. Second, assessing valuation should be more comprehensive than analyzing one ratio like P/E, as metrics like sales, cash flow, book value, and enterprise value also matter. Third, analysts often ignore factors that can justify a stock's premium valuation, which might include outstanding profitability, high-growth potential, consistent earnings beats, or, in the case of some defensive stocks, excellent downside protection.
It's the combination of all these known factors, plus many other unknown ones too, that help market participants determine price, and it's my goal today to synthesize this information for you to demonstrate that:
1. QQQ trades at a 21.4% premium on forward earnings compared to SPY but makes up for it with 4.17% more estimated one-year earnings per share growth (31.78% on a relative basis)....
Read the full article on Seeking Alpha
For further details see:
QQQ: My In-Depth Look At The Nasdaq-100 Fundamentals
