I study stock market for more than a decade, for long term, and I perfectly now that company data should not be analysed in a isolatedly, but, any stock with P/E ratio 230.24 you need to be very careful, and put just the money you can afford to lose without disturb your sleep.
For whom that does not understand company ratios, a P/E ratio 230.24 is meaning that you need 230 years of profits to return to you the price you are paying today, of course, this does not consider that the company and profits will grow. But to have a parallel, at least in my country, really good companies have a P/E between 20 and 30, on average, and 30 is considered very high.
This view ignores revenue growth. If the company is growing like a weed it may choose to reinvest everything and keep profit near zero. If there's no dividend the profit would just go into a war chest and collect some minimal interest rate. If the company thinks it can get a better return on investment by spending all income on growing itself it has every reason to do so, and all it has to do is beat that minimal interest rate. The only reasons not to: you have no ideas where to spend your own money to result in growth, you expect that reportable earnings will look good to some investors, you want a war chest to make some giant acquisitions, or you're planning on starting to issue a dividend relatively soon.
Amazon has always had near zero earnings. Over the last 10 years its grown from ~$17 billion revenue to ~$140 billion in revenue. Yet they have almost no earnings! Barely profitable! It's wild and irresponsible! Yet Amazon is not on the brink of collapse. Despite near 10x growth their earnings have always been completely flat, near zero. Why is that? They're not booking earnings because they can't, they're not booking earnings because they're choosing not to, by spending it on growing themselves. It could be seen as a good thing: Amazon has lots of areas to invest in itself, if they didn't, maybe they're running out of ideas. Netflix has also grown by about the same multiple over the same time period as Amazon.
Now, on the other hand, Netflix's price to sales is about twice that of Amazon. Amazon's price to sales is about the same as Apple.
Yes, you are perfectly right! I confess I forgot about this point of the earnings. USA tax system is different of my country.
Here, companies pay taxes about all the income, and on USA you have deductions when reinvest income in some kind of expenses. I believe this is why some companies spend it almost all, because the rules of the game are favoring to to this.
So, the P/E ratio is almost irrelevant (or more complex to include on analysis) on USA than here.
I've held NFLX since 2013. I'd buy it again today, even at these prices.
My view is that profits are low because NFLX is investing everything in original content.Their last 4 quarters of profit is about $550 million. But their spend on original content is expected to be $7 - $8 Billion in 2018 [0]. Theoretically, that $7 - 8 Billion, less income tax, could fall to the bottom line, putting their P/E in a much more reasonable ~20 range.
AMZN is taking the same strategy: Invest in growth above all else and defer profits until the company is 'huge'. Moreover, for NFLX, revenue growth is accelerating (+23% 2016 vs. +30% 2017). Given the performance of management, both at NFLX and AMZN, it's a reasonable calculated risk to buy shares, even today, even at these outrageous prices.
For sure, dividends donesn't mean nothing here.
If a company is profitable and don't pay dividends to shareholders, they need to do something with the money that are accumulating, and they will invest on the company (new machines, products, services, etc. all accordingly with the company strategy), and if the company grows with this investments, the stock price will follows it.
How stock price follow it ? In a hypothetical scenario, if company declare not to pay any dividend any time in the future, nobody will invest in it no matter what.
Because the money is on the bank, and it's shareholders property.
The shareholders can change the administration council and hire people that will use the accumulated money to make more money, or use it paying dividends. The shareholders are the bosses, and chooses who occupies the administration council.
I don't know if my hypothetical example was clear.
If the company is closely held the shareholders may not be able to meaningfully affect the composition of the board of directors, and so may not be able to extract any value from it except in bankruptcy.
Really? Bitcoin pays no dividend and people buy it, even though at this point it's basically as useless as a stock that pays no dividend. I say this as a Bitcoin holder who does nothing with his Bitcoin because it's too slow and the transaction fees are too high.
Yes. Any public company must ultimately pay a dividend to be valuable.
Edit: All of my responders are ignoring my use of "ultimately". A company can certainly invest in growth, but growth only matters if the company eventually returns money to shareholders, and the only way to do that is a dividend.
This is nonsense. P/E is a measure of earnings against the price of one share. A high P/E does show that current earnings are small (or negative) in relation to share price, but there's no time component inherent in P/E.
A high P/E shows that the current profits are very far from the stock price. The expectation of grow are high. Good companies has high P/E too. On this case, 230 P/E is a really high expectation.
edpichler's description of P/E is correct. Quoting from wikipedia for a slightly more formal definition:
"Trailing P/E" uses the weighted average number of common shares in issue divided by the net income for the most recent 12-month period. This is the most common meaning of "P/E" if no other qualifier is specified.
Yes earnings is for the past 4 quarters but by time component I mean his assertion that "P/E ratio 230.24 is meaning that you need 230 years of profits to return to you the price you are paying today" which is utter nonsense.
Perhaps it would help if you could explain why it's wrong instead of calling it utter nonsense, because it matches my understanding of P/E ratio.
Here's the example from the same wikipedia link:
As an example, if stock A is trading at $24 and the earnings per share for the most recent 12-month period is $3, then stock A has a P/E ratio of 24/3 or 8. Put another way, the purchaser of the stock is investing $8 for every dollar of earnings.
Now say the company behind stock A is paying out 100% of its earnings as a yearly dividend of $3/share and is taking no additional investment, so it isn't growing. It's going to take 8 years (the P/E) to recoup the $24.
I've never seen a years recouped metric in reference to P/E used in a professional context ever. You don't see it because you're holding everything static. This makes no sense (particularly in the case of growth stocks) because the whole point is that you're expecting growth in earnings and that number is going to wildly change over time periods and what earnings you use.
One of the biggest reasons why P/E is a relevant metric is that it enables you to easily compare stocks between one another.
There absolutely is. For a company to be valuable, it must return more profit to shareholders than they put in. The P/E ratio indicates how long it will take for this to happen.
Not really, it indicates how long if nothing changes over the long term. Which never happens. Netflix is growing very rapidly which makes P/E all but meaningless for "how long" questions.
The metric that Netflix uses is subscriber count, and all indications is that the subscriber count is not growing at a pace that explains the PE ratio. In fact the growth is declining as evidenced by their guidance for the quarter.
That's under the assumption that all you can do with a stock is hold onto it and pocket all the profits.
If I buy a house, put in a pool, then sell the house for $100k more than I bought it a year later, it doesn't matter too much what the initial price was, except in comparison to other investments
You can always sell the Netflix stock after pocketing some dividends or something. The purchase price is not money lost, because now you have the stock.
I get P/E being important for someone trying to buy a company.
In raw "what is possible" terms I cannot fault you. But I really like the idea of fundamentals, and "what is likely" is a different kettle of fish.
In a sense, share prices compete with the cost of starting a new company that does the same thing. P/E ratios of 230:1 mean an increasing risk that instead of someone buying your shares, they go and start a competitor. Then everyone buys that competitor instead.
In any market there is an upper limit to the P/E ratio, and nobody wants to be the buyer who finds it. Especially if the company's income doesn't rise; because then you have to sell at a loss to recover any money.
In practice, there is also the risk of catching a collapse in the market. They happen that, once every decade or so? Great time to be able to rely on an income stream when that happens.
You are right, but I am talking about investing for long term.
For short term, most of the time, just the price chart is analysed.
Just to write here, long term and short term (speculation) is totally different. I was talking just about very long term.
Speak for yourself, I own some Amazon shares and I like their financial prospects... Bezos is playing the long game and I'm happy to be along for the ride.
I wouldn't put my money there. There is a lot of better choices with more return of investment. But, it's my money, you can do whatever you want with yours.
> There is a lot of better choices with more return of investment.
Except it has actually been one of the best choices to put your money for quite some time. Things can always change, but an average annualized return of 38% over the past five years is really hard to complain about.
For whom that does not understand company ratios, a P/E ratio 230.24 is meaning that you need 230 years of profits to return to you the price you are paying today, of course, this does not consider that the company and profits will grow. But to have a parallel, at least in my country, really good companies have a P/E between 20 and 30, on average, and 30 is considered very high.