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This is not an appropriate use of a PE multiple because different companies have different growth rates at various stages. The earlier the life cycle, the high
by jboydyhacker 16y ago
This is not an appropriate use of a PE multiple because different companies have different growth rates at various stages. The earlier the life cycle, the higher the PE given potential growth later on is much higher. This post is actually pretty misleading and gives people the wrong idea about how PE multiples should be applied.
- yoseph 16y agojboydyhacker, You're right that different companies have different growth rates at various stages. But, to me, it still doesn't add up. From another comment I made below: "I understand the argument about growth, but even from that end, it doesn't completely stand up. If we were to use the PEG Ratio (http://en.wikipedia.org/wiki/PEG_ratio http://en.wikipedia.org/wiki/PEG_ratio), for Facebook to be fairly valued at $50B, it has to grow its Net Income by 100% annually, on average over the next five years. It's possible Facebook might be able to do that next year, but then it'll have 1 billion users. That's 14% of the world's population. That's huge. Being generous though, let's extend that 100% growth into the year after. Then, Facebook would have 2 billion users, 28% of the world's population, and assuming current margins, they would only be eeking out $2 billion in profit. Will it be worth $200 billion then? I would say no and I would say Facebook's not worth $50 billion now."