Fundamental Analysis

P/E ratios, revenue growth, margins — evaluate what a company is actually worth.

In this lesson

What is fundamental analysis?

Fundamental analysis evaluates a company's actual business to determine if the stock is cheap or expensive relative to its true value.

While technical analysis asks "which way is the price going?", fundamental analysis asks "is this company worth what the market says?"

For longer StockPrince challenges (weekly, monthly), fundamentals matter because the market eventually reprices stocks toward their true value.

P/E ratio (Price-to-Earnings)

P/E = Stock Price ÷ Earnings Per Share

It tells you how much investors are paying for each dollar of profit.

S&P 500 average: ~20-25. This means investors pay $20-$25 for every $1 of annual earnings.

Low P/E (10-15): Stock may be undervalued — or the market expects earnings to decline.
High P/E (30-60+): Market expects strong future growth. Tech stocks often trade here.
Negative P/E: Company is losing money. Not always bad (early-stage growth companies).

Compare P/E within the same sector. A P/E of 30 is cheap for a high-growth tech stock but expensive for a utility company. Context matters.

Revenue growth and margins

Revenue growth — How fast is the company growing sales year-over-year?
- 5-10%: Solid, mature company
- 15-25%: Growth stock
- 30%+: Hypergrowth (NVDA has grown 100%+ in recent years)

Profit margins tell you how efficient the company is:
- Gross margin: Revenue minus cost of goods. Software companies often have 70-80% gross margins.
- Net margin: Bottom-line profit after all expenses. 15-20% is excellent.

Putting it together

The best challenge picks for longer formats combine:
- Reasonable P/E relative to growth rate (the PEG ratio should be ~1.0 or below)
- Accelerating revenue growth — getting faster, not slower
- Expanding margins — growing more efficiently
- Upcoming catalysts — earnings, product launches, analyst days

A stock with strong fundamentals AND a near-term catalyst is the ideal weekly/monthly challenge pick.

Practice

Scenario 1 of 3

+15 XP

You're comparing two stocks for a weekly challenge. Stock A: P/E 15, revenue growth 5%, no upcoming catalysts. Stock B: P/E 35, revenue growth 40%, earnings report in 3 days.

Which is the better pick for this week?

Scenario 2 of 3

+15 XP

You're comparing NVDA (P/E 65, revenue growth 120%, gross margin 75%) with INTC (P/E 30, revenue growth -5%, gross margin 42%) for a monthly challenge.

Which company has stronger fundamentals despite the P/E difference?

Scenario 3 of 3

+15 XP

A company reports Q3 earnings: revenue up 25% year-over-year (beating estimates by 3%), but gross margin compressed from 65% to 58%. The stock drops 8% after-hours.

Was the market reaction justified?

Knowledge check

+50 XP

1. What does P/E ratio measure?

2. A company with 40% revenue growth and P/E of 35 is:

3. Why do fundamentals matter more in longer challenges?

Apply what you learned

Find an undervalued stock for your next weekly challenge