AAPL's P/E ratio is ~10x. For comparision, GOOG's is ~23x. AMZN's P/E is ~3,257x.
At $13.1B AAPL made 4.5x what GOOG ($2.89B) did last quarter, And, in that one quarter, earned profits that are ~7x what AMZN has made during its entire existence.
So, yes. It's not entirely clear how "Wall Street" is assessing these tech companies against respective share prices.
I think it might be fairer to look at AMZN's price to revenue ratio and compare that with other big companies which have margins AMZN might reasonably have when they start trying to make profits. That would maybe give a reasonable understanding of expected upside. Looking at their profits when they aren't trying to make a profit is a little silly.
GOOG on the other hand I think is a fair enough comparison. Actually GOOG has pretty much failed at all their attempts to make money off anything but ads, which I consider kind of worrying.
PS FYI you posted this twice and the other one is marked dead. I recommend deleting it.
For example, Amazon has about half the market cap of walmart, but has 10% of the revenue. If you think Amazon can expand 5x, then focus on making similar margins as walmart, that would justify the current price.
While I think Amazon could potentially grow their revenues 5x, I don't think it makes a lot of sense to own something that has to grow 500% to be fairly valued. To me that shows just how absurd their current valuation is. If I have a company grow 5x I'd like to think I'll make some money. In this scenario though, it just becomes fairly valued at that point.
Frankly, I'd love to own some Amazon stock. I think it's an amazing company with lots of potential. I just can't justify paying the current valuation. I'll probably regret it someday, but for now I'll stick with Apple and their 7 pe. Even if they lose all growth its worth much more than this. It's priced as if they are going out of business right now. I'd pay this much for either their iPhone or iPad business, not to mention having both, Mac, iPod, and anything new they come up with. They sold > 75 million devices last quarter. Doesn't exactly seem like a dying business to me.
If you "know" a company is going to grow 5x, other people are going to know that too. And if I know a company's stock price will soon be 5x what it is today, I'll happily pay 2x for it; 2.5x return is still amazing. Hell, I'd pay 4x today's price, because a 20% return is nothing to sneeze at. Other people will too. Pretty soon today's price becomes tomorrow's (estimated) price, with various discounts applied for risk and whatnot.
True, but based on our logic and math, it has to grow 5x to break even. Apparently everyone "knows" it's going to grow 6x soon. It just seems to me there aren't any discounts being applied for risk.
While I have no doubt amazon can grow 5x, I do have some doubt as to timeframe. If it did it this year I'd be happy to own it at these prices. I think it's probably at least 5-10 years from that. 0-20% return over that timeframe isn't very good.
That makes amazon overpriced by, what, 25%? Which is not particularly shocking. Lots of stocks are a bit overpriced. AMZN is popular. Don't buy it. Shrug.
When you compare a 3000 P/E to a 20 P/E, you might come away thinking amazon is overpriced by a factor of 100, which would be shocking. But I don't think there's any reasonable case that it's overpriced by a factor of more than 2.
Depends. If you think it's growing 10x, then it is discounted. I arrived at 5x by working back from the stock price, doesn't really mean that's the "right" answer. I'm not trying to justify amazons price, just explain what the people who do believe in it are thinking.
You should think of Amazon more like a real estate holding company. You could be incredibly successful buying and selling properties and never actually turn a profit, because you continually reinvest in new properties. You could easily have no profits and still have assets worth billions.
That's what Amazon is, except their assets are market share and infrastructure.
Maybe 20 years is too long for you to wait, but that's fine! The stock is priced accordingly so just cash out and let someone sweat the final liquid value of the assets.
>I think it might be fairer to look at AMZN's price to revenue ratio and compare that with other big companies which have margins AMZN might reasonably have when they start trying to make profits.
There is no indication that they will ever make huge profits. The Amazon you see is that Amazon you WILL see for the next 10-15 years at least.
It's absolutely clear how "Wall Street" assesses any company.
"Wall Street" assesses stocks based on whether they can make money at a given valuation. Full stop. They are not investing. The are not acting as agents for investment. They are identifying and executing trades.
If you're trading, an undervalued company you can't convince anyone else to pay more for (or less for, to profit via shorting) isn't a "value".
Because it's simply not about fundamentals.
I fully expect that when Wall Street can no longer convince anyone to pay less for Apple shares, they will begin building the "Apple is unstoppable" narrative and attempt to make money on increasing share price, driving it back up to a record peak. At which point they'll start the cycle over.
I think it's quite easy to understand Apple's low P/E. Smartphones isn't like other industries, it changes quickly. The fact that Apple earns so much money now doesn't guarantee it can still do it in 5 years, much less 10. Just look at Nokia, RIM, etc. The market thinks that Apple doesn't have a lot of headroom for growth but has a much larger danger of a huge decline, so its long term expected yearly income is lower than its current one. And the E you use to calculate P/E should actually be the long term expected earnings.
Wrt "...the E you use to calculate P/E should actually be the long term expected earnings"...
You may be thinking of Forward P/E. But Forward P/E only attempts to project earnings out 12 months.
The E in P/E is the measure of actual earnings over time. The P/E ratio is, quite literally, the number of years required to pay back a stock's purchase price at constant dollars and earnings. AAPLs P/E ratio indicates it would take AAPL 10 years to pay back its current stock price. GOOG's indicates 20+ years. AMZN's P/E ratio indicates it would take over 3000 years to do the same.
You may be right, and AAPL's P/E ratio may be closer to 5 than where it is currently (where the drop comes from a lower stock price). But then, so should AMZN's.
Wrt the "the E you use to calculate P/E should actually be the long term expected earnings" comment I made..
I was not trying to say that the standard financial metric called P/E ratio should be calculated this way. Rather I think that ideally or principally it should be calculated this way, because what matters is "how many year will it take for me to recoup the money?", not "how many years will it take for me to recoup the money assuming that the company's earnings remains the same?".
But obviously you don't know the company's future earnings, so to make an actually computable metric you can only use the current earnings as an estimate.
"The P/E ratio is, quite literally, the number of years required to pay back a stock's purchase price at constant dollars and earnings."
Yes, this is what I mean. I'm no expert on stocks and am not familiar with the terms, but the principle should be there.
Say the "normal" P/E is around 15, which means that people think it's fair to be able to recoup the stock's price in 15 years. Now why Apple's P/E is only 10? That's because people think its future earnings will drop (in statistical sense), so that the current price will still be recouped in roughly 15 years. Similarly, Google's P/E is 20+ because people think its future earnings will rise, so that again the current price can be recouped in roughly 15 years.
Amazon's large P/E isn't that abnormal if you consider that there are plenty of companies which are losing money yet still have a positive stock price. Maybe they have lots of assets, and maybe people expect them to return to profitability soon.
For struggling large companies this can even be a gamble. If you think the company has a 5% chance of returning to glory and earn big, and 95% chance of never earning a profit again, the company can still have a pretty decent expected future earnings in statistical sense.
It's also important to note that aapl has $150 per share just in cash. They actually have more cash than Amazon's entire market cap. If you discount the cash, their PE is closer to 7.
Share price is supposed to reflect growth potential. The skepticism around APPL at the moment reflects the suspicion many of us have that Apple's phenomenal growth spurt has peaked.
"Wall Street" values companies by projecting future cash flows discounted back to the present. Note AAPL is only making that much per Q for the second time in its history. In 2011 it made only 60% of what it makes now. In 2010 30%. If someone can guarantee that AAPL will continue its profitability at its present level of course it is very undervalued. But there is no guarantee and right now it looks like that investors does not give it a very high chance. Just to maintain its current pace AAPL needs to sell close to 200B this year or about $30 to every single person on the planet. But that is not enough it will have to do that year after year for an extended period of time. You say P/E of 10 -- then you better be able to do what you are doing for at least 10 years. And that is always hard to see for tech once a company stops growing -- so called inflection point. Case in point is to check out how long Motorola, Nokia, RIM each maintained their leadership position in mobile. And once they fell, they fell hard. Maybe this time it IS different.
At $13.1B AAPL made 4.5x what GOOG ($2.89B) did last quarter, And, in that one quarter, earned profits that are ~7x what AMZN has made during its entire existence.
So, yes. It's not entirely clear how "Wall Street" is assessing these tech companies against respective share prices.