What is the core essence of growth stocks? It is to digest the valuation with the high-speed growth of performance. Many people's first reaction when looking at growth stocks, especially those in the AI industry chain, is "With such a high P/E ratio, would you still dare to buy?" Taking advantage of this morning's response, we can talk about the logic of "EPS high-speed growth digesting valuation". The core is one sentence: if a company makes money quickly enough, it can use time to pull the current seemingly expensive valuation to a reasonable or even cheap level. 1. Let's talk about the most confusing points first Price to earnings ratio=stock price ÷ earnings per share (EPS) High P/E ratio=You are paying more for every dollar of profit now, which looks expensive. But what growth stocks buy is never the money already earned, but how much money can be earned in the next few years. If the company's EPS (earnings per share) continues to grow rapidly every year, the future EPS base will continue to grow. The same stock price, divided by the increasing EPS, naturally results in a lower P/E ratio. This is' digestion '. Simply put, growth increases the denominator (profit) and dilutes the high valuation. 2. Give the most straightforward numerical example Assuming there is a stock now with a stock price of 100 yuan This year's EPS is only 2 yuan Price to earnings ratio of 50 times (many people say 'too expensive' at first glance) Scenario A: Annual EPS growth of 30% (relatively stable growth) Year 1: EPS becomes 2.6 yuan → P/E ratio drops to about 38 times Year 2: EPS becomes 3.4 yuan → P/E ratio drops to about 29 times Year 3: EPS becomes 4.4 yuan → P/E ratio drops to about 23 times Year 5: EPS becomes 7.4 yuan → P/E ratio is only about 13.5 times Scenario B: Annual EPS growth of 50% (a direction that many AI supply chain companies are striving for) Year 1: Price to earnings ratio of approximately 33 times Year 2: Approximately 22 times Year 3: Approximately 15 times Year 5: Only 6-7 times left You see, the stock price hasn't changed much, it's just that the company is making more and more money, and the P/E ratio has dropped on its own. This is called using growth to digest valuation. The faster the growth, the more thoroughly it is digested. It takes 2-3 years to see significant results, and within 5 years, it is basically completely digested. Why can some stocks with high P/E ratios still be bought? Because the market does not offer a price based on current profits, but rather a pricing for future profit growth. At the stage of AI infrastructure, many companies are still investing heavily and their profits have not been fully released, so the price to earnings ratio is naturally high. But as long as there are real orders landing later, EPS will accelerate its growth. At this point, what you are buying is not a 'story', but a visible rhythm of performance realization. Once growth is realized, high valuations are gradually digested, leaving room for stock prices. On the other hand, if we only rely on telling forward stories without orders, verification, or performance growth, then high valuations cannot be digested and instead become risks. So everyone will look at the forward P/E ratio and forward P/S ratio, which is essentially this logic. The core is to see how much business growth can digest the valuation in the next year or two. 4. How to determine if the growth is sufficient to 'digest' the valuation? It was originally Peter The simple indicator proposed by Lynch is called PEG (Price to Earnings Ratio Taking Growth into Account): PEG=Price to Earnings Ratio ÷ Expected Annual Growth Rate (%) PEG is close to 1, and the price and growth are basically matched, which is quite reasonable PEG is significantly less than 1 → growing rapidly, relatively not expensive PEG significantly greater than 1 → average growth, relatively expensive price Example: A stock has a P/E ratio of 50 times, but is expected to grow by 50% annually → PEG=1 (acceptable) Same P/E ratio of 50 times, but only increasing by 20% → PEG=2.5 (expensive) Price to earnings ratio of 20 times, but only increasing by 10% → PEG=2 (also expensive) So we can't just look at the price to earnings ratio, we need to see if the growth can keep up. 5. How to use this logic in actual investment? The pace of investment is crucial. The story stocks that only talk about "how AI will be great in the future" are easily backfired by high valuations. The companies that truly have orders and can see a significant increase in EPS from 2026 to 2027 are the ones that truly digest the valuation of growth. Three core judgments: Is there a real driving force for growth (orders, customer verification, capacity ramp up)? Can the growth rate cover the current valuation? (Looking at PEG, looking at the compound annual growth rate of EPS in the next 2-3 years) If the growth does not meet expectations, where is the safety margin? 6. Also talk about risks Growth digestion valuation is not automatic, its premise is that growth really happens. If the company encounters many problems: The order has not been fulfilled yet Intense competition leads to price wars Macro or industry cycle reversal The company's own execution capability is problematic The high valuation not only cannot be digested, but also further kills the valuation due to disappointment, which is the most tragic situation at this time. So the truly knowing approach is to buy companies with clear growth paths that have already begun to cash in, rather than just drawing a cake. This way, even if there are short-term fluctuations, the valuation can be digested with time and real growth. Having discussed so much above, the most crucial factor is actually growth, especially the speed of growth. A high P/E ratio is not scary, but the scary thing is that growth cannot keep up. As long as EPS can maintain high-speed growth, within 2-5 years, it can digest the current seemingly expensive valuation into a reasonable or even underestimated level. This is not a theory, it is the real path that many growth stocks have taken in the past. So the key to investing in growth stocks is always two things: The certainty of growth and the pace of realization. We need to be clear about whether a growth stock is digesting its valuation with growth or overdrawing its valuation with stories.