Why Do Tech Stocks Trade at Such High P/E Ratios? A Cheat Sheet for Valuing U.S. Stocks by Industry

Anyone who invests in stocks has wrestled with this question at least once.

These questions mark a critical turning point between investment success and failure, and they highlight the importance of stock valuation. Spotting good businesses is important, but in value investing, the core principle is buying shares of those businesses at a “good price.”

Many investors use valuation metrics such as the P/E (Price-to-Earnings) ratio and P/B (Price-to-Book) ratio. But simply comparing the numbers makes it hard to grasp a company’s true value. Even with the same P/E of 10x, in one industry it may signal deep undervaluation, while in another it could be a sign of overvaluation.

That’s because each industry differs in how it makes money, how fast it grows, how much capital it needs, and what kinds of risks it faces. For example, you can’t evaluate a fast-growing IT company driven by innovation using the same yardstick as a consumer staples company with stable cash flows, can you?
So to succeed in stock picking and value investing, you must understand the unique traits of each industry and develop the ability to assess value with the right “frame of reference.”

This piece was created to help you work through exactly these concerns.
Rather than just listing definitions of valuation metrics, it will offer practical insight into why valuation approaches must differ by industry and what to focus on for each of the major U.S. industries.
If you read through to the end, you’ll come away with a broader and deeper perspective before making investment decisions.

If basic valuation terms like P/E and P/B still feel unfamiliar, we recommend reading the article linked below before diving into the main content. Understanding these fundamentals will make it much easier to follow along with what we discuss here.

As you invest in stocks, you’ll often find yourself becoming more curious about specific industries. That’s because each industry grows differently, earns money differently, and even attracts investor attention for different reasons.

In this section, we’ll look at the defining traits of the major industries that represent the U.S. stock market, explore which valuation lens best fits each one, and highlight what you should pay close attention to when investing.

The U.S. IT sector is like the beating heart of global innovation. From the smartphones, computers, and internet services we use every day to cutting-edge technologies such as artificial intelligence (AI), cloud computing, and semiconductors, there is virtually no area untouched by IT.

The biggest hallmark of this sector is its rapid growth and constant change.
New technologies emerge nonstop, and yesterday’s champion can easily be pushed aside by today’s challenger. That’s why IT companies strive to secure technological leadership and create new markets through continuous investment in research and development (R&D).
As AI technology has emerged as the core growth engine for the entire IT sector, related areas such as AI semiconductors, AI software, and AI services have seen particularly strong growth.

Another key feature of IT companies is the wide variety of their business models. Some, like Microsoft or Adobe, offer software on a subscription basis through the SaaS (Software as a Service) model. Others, like Apple, sell hardware devices. Companies such as Nvidia or Intel design and sell semiconductors, while others focus on providing IT consulting services. These different business models have a major impact on each company’s revenue structure and growth potential.

For IT companies—especially fast-growing tech stocks—share prices are often driven more by revenue growth and future market dominance than by current profits. As a result, traditional profit-based metrics like the P/E ratio (Price-to-Earnings) often take a back seat to indicators like the following:

To properly value an IT company, you need to understand one hidden detail in its financial statements: R&D (research and development) expenses. Most IT companies pour substantial amounts of money into R&D to drive future growth. Under current GAAP accounting standards, however, most of this R&D spending is treated as an expense. This contrasts with, say, an automaker’s spending on building a factory (capital expenditure, or capex), which is recorded as an asset.

Why is this an issue? R&D spending is, in many ways, an “investment” that can generate larger profits in the future. But if all of it is expensed, current earnings look lower and the company’s asset value can appear understated. For this reason, some analysts treat R&D more like an asset when valuing IT companies and adjust the numbers accordingly (a process known as “R&D capitalization”) to uncover hidden value.

Because expectations for innovation and growth run so high in the IT sector, traditional valuation methods alone often struggle to capture its full value.
It is therefore crucial to look holistically at factors such as revenue growth, potential for market share expansion, technological leadership, and the ability to create future value through sustained R&D investment.

The healthcare industry is one of the sectors most closely tied to our daily lives.
It is directly connected to humanity’s basic needs: treating disease, managing health, and extending life. Broadly, the industry can be divided into three areas: pharmaceuticals and biotechnology (biotech), which develop and sell new drugs; medical equipment and supplies, which manufacture and provide medical devices; and healthcare providers and services, which operate hospitals and deliver related services.

The biggest appeal of the healthcare industry is its “structurally growing demand.” As populations age around the world and chronic diseases increase, demand for healthcare services and products continues to rise. On top of that, breakthrough technologies such as gene therapies, AI-driven drug discovery, and advanced medical technologies are powerful engines driving the sector’s growth.

But we shouldn’t forget that the healthcare industry also has a sharp edge on the other side. Despite how attractive it looks, this sector is also defined by “high regulatory barriers” and “long development cycles.”
In particular, for new drug development, it typically takes more than 10 years and enormous capital for a single drug to reach the market, yet the probability of success is very low. On top of that, companies are highly sensitive to changes in regulation, such as government drug-pricing policies and the scope of insurance coverage.

When valuing healthcare companies—especially pharma and biotech—you need a special lens that’s different from how you would look at a typical manufacturer. Current revenue and profit matter, but the real key is correctly assessing the value of the “pipeline,” which captures the company’s future growth potential.

One of the methods experts often use to value pharma and biotech companies—especially early-stage drug developers with no revenue yet—is the “risk-adjusted net present value (rNPV)” model.

What is it? Put simply, you project the future cash flows a drug in development is expected to generate, discount them back to today’s value, and then multiply by the probability of success at each clinical stage to reflect risk.

For example, suppose a new drug is in Phase 3 trials with a 60% probability of success. You would multiply the value if it succeeds by 0.6. If a drug is only in Phase 1, its probability of success would be much lower (say, 10%), and the probability applied in the valuation would be reduced accordingly.

rNPV is complex and relies on many assumptions, but you can think of it as an attempt to value highly uncertain drug development in a more rational way.
Because expectations about the future have such a large impact on present value in healthcare—especially in pharma and biotech—it is crucial to look beyond the headline financial statements and carefully assess the hidden potential and success probabilities of the pipeline.

The financial sector creates and manages the “pathways where money flows” in our economy. Banks, brokerages, and insurers are the most representative players. Banks take deposits and extend loans, brokerages facilitate stock trading, and insurers help households and companies prepare for future risks. In this way, finance plays a crucial role in both the dynamism and stability of the overall economy.

One defining feature of the financial industry is that it is heavily regulated. Because it deals directly with money, stability is paramount, and the sector is subject to strict government oversight. It is also highly sensitive to interest-rate changes. When rates rise, banks’ net interest margins (the spread between deposit and lending rates) can widen and boost profitability, but at the same time, a weaker economy can increase the risk of bad loans.
More recently, technology-driven financial services known as FinTech have emerged, putting traditional financial institutions under pressure to change and innovate.

When valuing financial stocks—especially banks—you need to focus on a slightly different set of metrics than you would for other industries.

To properly value a bank, you can’t just look at its earnings. You also need to ask, “How safe is it?”—in other words, its financial soundness is critical. One of the key items to watch closely is loan loss provisions.

What are loan loss provisions? Some portion of the money a bank lends out will inevitably be at risk of not being repaid. Loan loss provisions are the reserves a bank records as an expense in advance for these expected losses.

When investing in bank stocks, it’s therefore important to examine not only metrics like PBR and ROE but also soundness indicators such as the level of loan loss provisions and the BIS capital adequacy ratio.
Seemingly “cheap” stocks can sometimes hide significant risks.

The consumer goods industry is a very broad field that provides almost all the products and services we eat, drink, wear, and use. It can largely be divided into two categories.

The competitiveness of consumer goods companies often comes from their brand power. Companies with powerful brands like Nike sneakers, Starbucks coffee, or Coca-Cola enjoy steady consumer loyalty, can maintain higher prices, and generate stable revenue.
Today, online shopping—especially e-commerce and mobile shopping—has become a core trend in the consumer goods market, and AI-driven personalized marketing is also growing in importance.

When evaluating consumer goods companies, you need to look at how consistently they grow, how well they manage their brands, and how efficiently they sell their products.

When discussing the value of consumer goods companies, one thing you can’t leave out is brand equity. Just seeing a Coca-Cola bottle brings to mind a fizzy, refreshing drink, and the Nike logo alone evokes a sense of dynamic athleticism. What kind of advantages do such powerful brands offer companies?

The challenge is how to quantify this brand equity and reflect it in corporate valuation. It’s not easy. Specialized firms like Interbrand and BrandZ publish global brand value rankings every year, but it is difficult to apply these directly to investment decisions.

Still, investors can estimate brand value indirectly.
For example, companies that consistently maintain higher gross margins than competitors or achieve high market share relative to their marketing spend can be inferred to have strong brand power. In addition, non-financial KPIs such as brand awareness and customer satisfaction surveys (including NPS) are also helpful in assessing brand equity.

Ultimately, when investing in consumer goods companies, you need the ability to look beyond the numbers in the financial statements and comprehensively assess the underlying brand strength, consumer perception, and the company’s ability to adapt to changing trends.

The energy sector covers the entire chain of activities involved in exploring, developing, producing, refining, and distributing a wide range of energy sources that are essential to our daily lives and economic activity—from traditional energy such as oil, natural gas, and coal to renewables like solar and wind. It is an extremely large, capital‑intensive industry.

Energy company share prices are highly sensitive to changes in international oil and natural gas prices. A variety of factors drive energy prices, including wars, geopolitical tensions, production decisions by major oil‑producing countries (such as OPEC), and the global economic cycle. Recently, as the global push for an energy transition—from fossil fuels to clean, renewable energy—has accelerated, the entire energy sector has been undergoing major changes and generating new investment opportunities.

Broadly, the energy sector can be divided as follows:

When valuing energy companies—especially traditional oil and gas producers—you need to look at a set of sector‑specific metrics that differ from those used for typical manufacturing companies.

To properly understand the value of an energy exploration and production (E&P) company, you need to know how to evaluate the value of the oil and gas buried underground—its reserves. One of the most widely used methods is PV‑10.

What is PV‑10? In simple terms, it is the present value of the net cash flows a company is expected to generate over the next 10 years from its current proved reserves, assuming current commodity prices. You subtract expected production and operating costs from those revenues and then discount the resulting future net cash flows at an annual rate of 10%.

PV‑10 is therefore a useful reference metric, but it should not be taken as gospel. It needs to be considered alongside other valuation indicators and a qualitative assessment of each company’s technology, operating efficiency, and future exploration success potential. Investing in the energy sector is attractive but challenging precisely because it requires weighing all of these complex factors together.

The industrials sector is a broad category that manufactures the machinery, equipment, and components needed for other industries to produce goods or deliver services, while also providing related services and handling logistics and transportation. Put simply, it provides the infrastructure and tools that underpin economic growth.

The industrials sector is highly diverse, but it can broadly be divided as follows:

The performance of industrial companies is heavily influenced by global economic conditions—especially corporate capital spending, construction activity, and international trade volumes. When the economy is strong and companies build new plants or expand capacity, demand for industrials tends to rise alongside it.
More recently, increased infrastructure investment, supply chain reconfiguration (reshoring), factory automation and the spread of smart factories, and the adoption of green technologies have emerged as new growth drivers for the industrials sector.

Because industrial companies span such a wide range of businesses, the key metrics to focus on when valuing them differ slightly by subsector.

If you look at investor presentations or earnings materials for industrial companies—especially those that run project-based businesses such as construction, shipbuilding, defense, and aircraft manufacturing—you will often see “order backlog” highlighted as a very important item.

Why does backlog matter?

What to watch out for when interpreting backlog

Order backlog is an important window into a company’s future, but it takes careful scrutiny of its composition and the wisdom to interpret it in conjunction with other financial metrics.

So far, we’ve looked at the characteristics of major U.S. industries and the valuation lenses that best fit each of them. From PSR for IT, to PBR for financials, to EBITDAX for energy companies, we’ve seen that each industry speaks about its value in a different way. The key is understanding the characteristics of each industry and analyzing companies using criteria that fit those characteristics.

How can you apply this knowledge to real-world investing?
First, it’s important to start with the industry you’re most interested in or believe you know best. Select one or two leading U.S. companies in that industry, and use the core valuation metrics and industry characteristics we discussed today—along with the advanced learning materials—to conduct your own comparative analysis.

What matters in this process is to keep asking “why?” “Why does this company score higher or lower on certain metrics than its peers?” “What are the growth drivers of this industry, and is this company riding that wave effectively?” The habit of asking yourself these questions and seeking answers will train your eye to see beyond surface-level numbers and into the essence of a business.

As you repeat this kind of analytical training, you will naturally develop your own value-investing principles that help you spot opportunities others overlook and detect potential risks in advance. Not every investment will be a success, but steady learning and a critical, analytical mindset are the most reliable way to achieve strong investment outcomes over the long term.

Ultimately, the essence of industry-specific valuation is remembering that there is no single right answer, but there are always smart questions. There is no universal formula that applies equally to every company and every industry. However, understanding the unique characteristics of each industry and making the effort to ask the right questions that fit those characteristics when analyzing a company’s value will significantly increase your odds of investment success.

We hope AWARE’s content serves as a reliable compass on your investment journey and helps you enjoy the process of discovering new investment opportunities.