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P/E is just one indicator of the value of a stock, and one that really doesn't make a whole lot of sense given how accounting works. Personally if I'm going to
by smakz 17y ago
P/E is just one indicator of the value of a stock, and one that really doesn't make a whole lot of sense given how accounting works. Personally if I'm going to invest in a company I look at free cash flow and the growth of the free cash flow way more closely then the more arbitrary P/E. Amazon is phenomenal in this regard.
- mattmcknight 17y agoFor companies that have stable capital expenditures, free cash flow will (over the long term) be roughly equal to earnings. For companies that don't have stable capex, the FCF will be more lumpy, because it doesn't allow for depreciation. In Amazon's particular case, FCF is exaggerated because of their delayed A/P cycle where items are purchased in one quarter which shows up in cash and paid for by Amazon the next quarter. If short term cash is growing while their bills are getting higher, but this is not reflected in FCF, Net Income is a better metric because it avoids this temporal distortion. Of course, if you think the hype is going to continue for a while, there is no reason not to buy into the momentum and make a short term buck, it's just not a good basis for a 10 year buy and hold as recommended by the original post.