As Mag7 results roll in, the most important question for the world’s most important companies isn’t whether they trade too rich to trailing profits or near-term earnings expectations, but rather if profit metrics are still the best way to value the businesses.

Big-tech’s perennially criticized for being overvalued, where “overvalued” typically refers to earnings multiples. Market participants are so conditioned to that criticism investors often don’t bother checking the numbers before applying it, which is to say the critique isn’t always informed or fair.

But now, with some of these companies marking an epochal transition from capital-light to capital-intensive business models, P/E multiples may be less important than metrics which take account of free cash flow.

In other words: As the hyper-scalers plow 50 cents or more of every spare dollar into capex, the juxtaposition between reasonable profit-based valuations and the vertical inflation in price/FCF multiples may be harbinger.

The figures above, from Goldman, illustrate the point. The figure on the left suggests mega-cap tech hasn’t been this reasonably priced on a PEG-basis since 2022, when the Mag7 cohort suffered a brutal bear market. The figure on the right shows you the impact of the capex binge: The price/FCF metric is more than double what it was a decade ago.

“Mega-cap tech valuations appear particularly low relative to earnings growth, but dwindling free cash flows complicate the signal,” Goldman’s Ben Snider remarked, editorializing around the visuals.

“Investors have increasingly questioned whether earnings-based valuations are appropriate for the stocks involved in the AI capex buildout,” he went on, noting that the disparity between low P/E ratios for mega-cap tech and sky-high price/FCF multiples “indicat[es] downside risk to valuations if concerns over the returns to AI investment continue to build.”

Food for thought.