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We should be careful with these types of articles and claims. Apple is trading at 18x earnings while Amazon is trading at 250x, as of this comment. Lower P/E ra

We should be careful with these types of articles and claims. Apple is trading at 18x earnings while Amazon is trading at 250x, as of this comment. Lower P/E ratios point to sturdier valuations in the market. In other words, AAPL is ACTUALLY worth its valuation in the eyes of the market, whereas AMZN would be dumped quickly should something spook investors. Just be careful on these rapid upticks, and be prepared to bail out if you went in too aggressively.

curuinor 9y ago
I like how 18x P/E is low nowadays!
- hcnews 9y ago
  This is because some of the successful businesses have learnt to build on their existing success. This is an evolution of previous generation of successful companies which mainly relied on working on one main idea. Now its become easier to built up on the infrastructure provided by previous generation's success. Or atleast that's what my current thought is regarding this topic.
  - opportune 9y ago
    It's really shuffling money from earnings into expanding an existing company is tax-advantaged. Let's say I own 100% of ACME, which made a $100 profit last year. Rather than receive that money as dividends and then reinvest it, which causes the money to be taxed now and for it to possibly be taxed at a higher rate than capital gains, I reinvest that money into ACME. This has the effect of deferring taxation on that profit and allows it to be taxed at the same rate as capital gains at a later date
- xkjkls 9y ago
  Price to Earnings less cash is probably a better metric anyways. If you take away the ~250 billion in cash that Apple has on their balance sheet, you end up with a P/E of around 12-13, which is a little below average historically.
paulpauper 9y ago
Ppl said that argument a year ago, 3 years ago, 5 years etc. AMZN has never been cheap by traditional valuation metrics. What one has to look at instead are operating margins and growth, both pf which are very strong.
- xkjkls 9y ago
  I mean, a business is worth present value of your future cash flows, so it all depends on how you think Amazon's future looks.
jonknee 9y ago
AAPL also has $285b in cash, so in some respects the market already values AMZN more than AAPL.
- howard941 9y ago
  A large cash stash signals a failure to identify worthwhile business opportunities. For other companies it'd be an ominous sign. For this one? Maybe it's like the OP's observation that a PE of 18 is now considered low.
  - btilly 9y ago
    For Apple specifically, I consider it a particularly ominous sign. When you look at Apple's history of identifying worthwhile business opportunities, it was all driven by one man - Steve Jobs. He is dead. And anyone else with his abilities is more likely to create a startup than to join Apple, spend decades rising the corporate ladder, and then reveal an unexpected talent for creating entirely new lines of business that undermine existing ones.
    - petra 9y ago
      True. Or that visionary will choose the other alternative - Join Google/Alphabet or Amazon with it's internal startups
    - prklmn 9y ago
      The amount of cash they have now isn’t comparable to what they had when Steve was alive. They have huge takeover money now. I think they’re saving it for a rainy day ie the next crash. Current valuations are historically very high, and it would be imprudent to start buying up companies now. They’ll get much more value if they wait, which they have been doing quite patiently.
  - whoisjuan 9y ago
    Apple has been sitting on large amounts of cash for several years and has yet to take a decision on how to use that cash. If they're not buying anything they should repurchase stock or pay dividends, but either way, you can totally see they don't have a clear M&A strategy. I mean, Beats? Shazam?... Apple has the financial power to buy a large supplier and reduce costs by vertically integrating their supply chain but they rather choose to pursue opportunities that have little to no impact on their added revenues.
opportune 9y ago
not true, amazon can always dump costs. P/E is meaningless beyond a certain ratio, at that point it just indicates that the business is growth oriented and reinvesting its profits
jandrewrogers 9y ago
The more important number here is the revenue to market cap ratio, which is very similar for both Apple and Amazon. Earnings numbers are fairly arbitrary for businesses that aren't being operated in a steady state.
JonasJSchreiber 9y ago
I had assumed this to be because their earnings were so small. For example Tesla has an undefined P/E ratio since it's a divide by zero. I had also assumed this to occur when a company sacrificed short term profitability for higher adoption. EDIT: not sure why the downvotes, but maybe because I'd incorrectly assumed earnings to a non-negative number. Still TSLA's P/E is N/A according to the few sites I've checked: https://finance.yahoo.com/quote/TSLA/ https://finance.yahoo.com/quote/TSLA/ https://www.nasdaq.com/symbol/tsla https://www.nasdaq.com/symbol/tsla https://www.marketwatch.com/investing/stock/tsla https://www.marketwatch.com/investing/stock/tsla https://stocktwits.com/symbol/TSLA https://stocktwits.com/symbol/TSLA
- garmaine 9y ago
  TSLA does not have zero earnings.
  - rrdharan 9y ago
    Correct, they have negative earnings, and their P/E is also correspondingly a negative number: https://www.nasdaq.com/symbol/tsla/pe-ratio https://www.nasdaq.com/symbol/tsla/pe-ratio
  - nabla9 9y ago
    Negative earnings are not genrally used when calculating P/E ratio. TSLA had price per losses ratio something like -30 last year.
btilly 9y ago
Anyone who thinks that Amazon's P/E ratio is meaningful of anything don't understand how Amazon operates. Full stop. Amazon has the choice between growth or earnings and is choosing growth into new lines of business. Do not think of Amazon as a large corporation (even though they are). Instead think of it as a network of startups under one corporate umbrella, with a unified management philosophy. That philosophy is reflected in publicly available documents like https://www.amazon.jobs/principles https://www.amazon.jobs/principles. The mature startups spin off an amazing amount of free cash. That cash is reinvested into new startups. The philosophy is that as long as Amazon has a good management structure, and is good at identifying opportunities, their startups will succeed at a higher rate than the general market. You still have to kill a lot of them, but the successes join winners like AWS and fund new ideas. They can pivot to profitability on a dime by simply killing a lot of their internal startups. They can keep earnings at zero by simply funding new startups. If you see Amazon's growth stop, or you see them taking profits, then they have shifted to being a different kind of company. Wake up, take notice, and re-evaluate. Until one of those two things happens, their P/E ratio will be ridiculously high and it will not matter. The two things that I see as long-term threats for Amazon are as follows. 1. Word about how bad they are to work for becomes sufficiently widespread among prospective top employees that recruiting becomes a challenge. 2. Some of their mature businesses start to fail, but are embedded strongly enough in the organization to make getting rid of them hard. Of those, the first seems closer to being an immediate issue. Though it is hard to believe that their reputation could become SO bad that it would really kill them. The second is likely the bigger long-term threat.
- xkjkls 9y ago
  > 1. Word about how bad they are to work for becomes sufficiently widespread among prospective top employees that recruiting becomes a challenge. I'd say word about Amazon's working environment is heavily overblown. There are many people who have worked there for years on end and greatly enjoy the experience, and their reputation still allows them the pick of the litter of any Comp Sci/MBA graduates.
  - btilly 9y ago

curuinor 9y ago

I like how 18x P/E is low nowadays!

hcnews 9y ago
This is because some of the successful businesses have learnt to build on their existing success. This is an evolution of previous generation of successful companies which mainly relied on working on one main idea. Now its become easier to built up on the infrastructure provided by previous generation's success. Or atleast that's what my current thought is regarding this topic.
- opportune 9y ago
  It's really shuffling money from earnings into expanding an existing company is tax-advantaged. Let's say I own 100% of ACME, which made a $100 profit last year. Rather than receive that money as dividends and then reinvest it, which causes the money to be taxed now and for it to possibly be taxed at a higher rate than capital gains, I reinvest that money into ACME. This has the effect of deferring taxation on that profit and allows it to be taxed at the same rate as capital gains at a later date
xkjkls 9y ago
Price to Earnings less cash is probably a better metric anyways. If you take away the ~250 billion in cash that Apple has on their balance sheet, you end up with a P/E of around 12-13, which is a little below average historically.

paulpauper 9y ago

Ppl said that argument a year ago, 3 years ago, 5 years etc. AMZN has never been cheap by traditional valuation metrics. What one has to look at instead are operating margins and growth, both pf which are very strong.

xkjkls 9y ago
I mean, a business is worth present value of your future cash flows, so it all depends on how you think Amazon's future looks.

jonknee 9y ago

AAPL also has $285b in cash, so in some respects the market already values AMZN more than AAPL.

howard941 9y ago
A large cash stash signals a failure to identify worthwhile business opportunities. For other companies it'd be an ominous sign. For this one? Maybe it's like the OP's observation that a PE of 18 is now considered low.
- btilly 9y ago
  For Apple specifically, I consider it a particularly ominous sign. When you look at Apple's history of identifying worthwhile business opportunities, it was all driven by one man - Steve Jobs. He is dead. And anyone else with his abilities is more likely to create a startup than to join Apple, spend decades rising the corporate ladder, and then reveal an unexpected talent for creating entirely new lines of business that undermine existing ones.
  - petra 9y ago
    True. Or that visionary will choose the other alternative - Join Google/Alphabet or Amazon with it's internal startups
  - prklmn 9y ago
    The amount of cash they have now isn’t comparable to what they had when Steve was alive. They have huge takeover money now. I think they’re saving it for a rainy day ie the next crash. Current valuations are historically very high, and it would be imprudent to start buying up companies now. They’ll get much more value if they wait, which they have been doing quite patiently.
- whoisjuan 9y ago
  Apple has been sitting on large amounts of cash for several years and has yet to take a decision on how to use that cash. If they're not buying anything they should repurchase stock or pay dividends, but either way, you can totally see they don't have a clear M&A strategy. I mean, Beats? Shazam?... Apple has the financial power to buy a large supplier and reduce costs by vertically integrating their supply chain but they rather choose to pursue opportunities that have little to no impact on their added revenues.

opportune 9y ago

not true, amazon can always dump costs. P/E is meaningless beyond a certain ratio, at that point it just indicates that the business is growth oriented and reinvesting its profits

jandrewrogers 9y ago

The more important number here is the revenue to market cap ratio, which is very similar for both Apple and Amazon. Earnings numbers are fairly arbitrary for businesses that aren't being operated in a steady state.

JonasJSchreiber 9y ago

I had assumed this to be because their earnings were so small. For example Tesla has an undefined P/E ratio since it's a divide by zero. I had also assumed this to occur when a company sacrificed short term profitability for higher adoption. EDIT: not sure why the downvotes, but maybe because I'd incorrectly assumed earnings to a non-negative number. Still TSLA's P/E is N/A according to the few sites I've checked: https://finance.yahoo.com/quote/TSLA/ https://finance.yahoo.com/quote/TSLA/ https://www.nasdaq.com/symbol/tsla https://www.nasdaq.com/symbol/tsla https://www.marketwatch.com/investing/stock/tsla https://www.marketwatch.com/investing/stock/tsla https://stocktwits.com/symbol/TSLA https://stocktwits.com/symbol/TSLA

garmaine 9y ago
TSLA does not have zero earnings.
- rrdharan 9y ago
  Correct, they have negative earnings, and their P/E is also correspondingly a negative number: https://www.nasdaq.com/symbol/tsla/pe-ratio https://www.nasdaq.com/symbol/tsla/pe-ratio
- nabla9 9y ago
  Negative earnings are not genrally used when calculating P/E ratio. TSLA had price per losses ratio something like -30 last year.

btilly 9y ago

Anyone who thinks that Amazon's P/E ratio is meaningful of anything don't understand how Amazon operates. Full stop. Amazon has the choice between growth or earnings and is choosing growth into new lines of business. Do not think of Amazon as a large corporation (even though they are). Instead think of it as a network of startups under one corporate umbrella, with a unified management philosophy. That philosophy is reflected in publicly available documents like https://www.amazon.jobs/principles https://www.amazon.jobs/principles. The mature startups spin off an amazing amount of free cash. That cash is reinvested into new startups. The philosophy is that as long as Amazon has a good management structure, and is good at identifying opportunities, their startups will succeed at a higher rate than the general market. You still have to kill a lot of them, but the successes join winners like AWS and fund new ideas. They can pivot to profitability on a dime by simply killing a lot of their internal startups. They can keep earnings at zero by simply funding new startups. If you see Amazon's growth stop, or you see them taking profits, then they have shifted to being a different kind of company. Wake up, take notice, and re-evaluate. Until one of those two things happens, their P/E ratio will be ridiculously high and it will not matter. The two things that I see as long-term threats for Amazon are as follows. 1. Word about how bad they are to work for becomes sufficiently widespread among prospective top employees that recruiting becomes a challenge. 2. Some of their mature businesses start to fail, but are embedded strongly enough in the organization to make getting rid of them hard. Of those, the first seems closer to being an immediate issue. Though it is hard to believe that their reputation could become SO bad that it would really kill them. The second is likely the bigger long-term threat.

xkjkls 9y ago
> 1. Word about how bad they are to work for becomes sufficiently widespread among prospective top employees that recruiting becomes a challenge. I'd say word about Amazon's working environment is heavily overblown. There are many people who have worked there for years on end and greatly enjoy the experience, and their reputation still allows them the pick of the litter of any Comp Sci/MBA graduates.
- btilly 9y ago