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> Those are normal values for the stock market (20-25). Presuming your experience in equities markets is within the last decade... Historical average is more

> Those are normal values for the stock market (20-25). Presuming your experience in equities markets is within the last decade... Historical average is more like 15 for SPX.

epgui 4y ago
If you're doing any fundamental analysis, you're going to end up doing one form or another of a DCF model. The expected rate of growth has a very big influence on your final estimated valuation, and it's normal for companies with a higher expected rate of growth to be valued at higher multiples. Whether the rate of growth will be as high as expected, that is the real question, and it is not a simple one or one you can easily wave off.
- qeternity 4y ago
  Thanks bud. Have spent my career trading at hedge funds, with a major focus being US equities.
  - epgui 4y ago
    Then I'm sure I didn't tell you anything you didn't already know :) I just had no way of knowing your background.
- jerf 4y ago
  This has been what has been confusing me about the market for the past quite-a-while with regard to the tech stocks. Were some of them doing well? Sure. Were some of them basically money fountains that needed just a slight turn to prioritizing profits over growth to make lots of money? Sure. But a lot of the tech giants were priced as if they had not already expanded into well over half the market, but as if they still had 99% of their market still in front of them and no competition in sight. As of this time last year, it is not plausible that Facebook is extremely likely to continue growth like crazy and increase their revenues per customer by a factor of 10 or 50 or something. Sure, their whole VR play may pay off hugely, but I couldn't say it's extremely likely the way their stock said. Netflix was not going to grow their subscription base by 10x and/or charge their customers 10-50x more. Etc. I mean, I guess it's within the range of possibilities for these companies, but these stocks were priced like it was all but guaranteed that these companies were going to see smooth sailing to levels of revenue I couldn't even remotely guess how they were ever going get to. How is Facebook, at this point, going to pivot into making $500/user/year from their current ~$20/user/year? And whatever your answer, what is the probability of that just smoothly working with no hiccups within the dollar-cost-value window it would have to take place in? In the last couple of months, I've been getting my answer to this question, and my confusion has been resolving.
  - epgui 4y ago
    The devil is certainly in the details, and valuations are often overly optimistic... But similarly, I believe there are a few really strong companies that are dramatically under-valued today, partly because they (purposefully and strategically) don't turn a profit yet, or because they trade at a very high multiple. Facebook is not one of the companies I spend a lot of time researching (but don't interpret this as me having a negative view of the stock-- I just have "no view"). Taking the time to read filings, as well as any investor materials these companies put out (with a critical and open mind, of course) goes a really long way.
cyral 4y ago
Here’s a chart of the historical average: https://www.multpl.com/s-p-500-pe-ratio https://www.multpl.com/s-p-500-pe-ratio
- IshKebab 4y ago
  Presumably higher average ratios correlate with lower interest rates though.
  - xyzzyz 4y ago
    In fact, you should expect P/E and interest rates to be strongly inversely correlated, purely by the nature of what these things represent.
mupuff1234 4y ago
It seems like the average p/e shifted higher in the last 30 years, so maybe 15 is no longer the "correct" baseline to compare to.
- francisofascii 4y ago
  My gut says you are right, but why is 30 years a better baseline timeframe than 5 years or 100 years?
happythebob 4y ago
Right but this is MSFT and AAPL. They're not going anywhere. Inflation is.
- kgwgk 4y ago
  I don’t know where they are going but they were trading around ten times earnings less than one decade ago. A PE ratio below 15 may look at some point even more reasonable than the current PE ratio over 25.
300bps 4y ago
Agreed and not only that but he needs to take into consideration forward look P/E whereas he’s looking at trailing P/E. If interest rates go up, everyone is surmising that tech stocks that benefit from lower interest rates will not be as profitable. And of course if we have a recession…

> Those are normal values for the stock market (20-25). Presuming your experience in equities markets is within the last decade... Historical average is more like 15 for SPX.

epgui 4y ago

If you're doing any fundamental analysis, you're going to end up doing one form or another of a DCF model. The expected rate of growth has a very big influence on your final estimated valuation, and it's normal for companies with a higher expected rate of growth to be valued at higher multiples. Whether the rate of growth will be as high as expected, that is the real question, and it is not a simple one or one you can easily wave off.

qeternity 4y ago
Thanks bud. Have spent my career trading at hedge funds, with a major focus being US equities.
- epgui 4y ago
  Then I'm sure I didn't tell you anything you didn't already know :) I just had no way of knowing your background.
jerf 4y ago
This has been what has been confusing me about the market for the past quite-a-while with regard to the tech stocks. Were some of them doing well? Sure. Were some of them basically money fountains that needed just a slight turn to prioritizing profits over growth to make lots of money? Sure. But a lot of the tech giants were priced as if they had not already expanded into well over half the market, but as if they still had 99% of their market still in front of them and no competition in sight. As of this time last year, it is not plausible that Facebook is extremely likely to continue growth like crazy and increase their revenues per customer by a factor of 10 or 50 or something. Sure, their whole VR play may pay off hugely, but I couldn't say it's extremely likely the way their stock said. Netflix was not going to grow their subscription base by 10x and/or charge their customers 10-50x more. Etc. I mean, I guess it's within the range of possibilities for these companies, but these stocks were priced like it was all but guaranteed that these companies were going to see smooth sailing to levels of revenue I couldn't even remotely guess how they were ever going get to. How is Facebook, at this point, going to pivot into making $500/user/year from their current ~$20/user/year? And whatever your answer, what is the probability of that just smoothly working with no hiccups within the dollar-cost-value window it would have to take place in? In the last couple of months, I've been getting my answer to this question, and my confusion has been resolving.
- epgui 4y ago
  The devil is certainly in the details, and valuations are often overly optimistic... But similarly, I believe there are a few really strong companies that are dramatically under-valued today, partly because they (purposefully and strategically) don't turn a profit yet, or because they trade at a very high multiple. Facebook is not one of the companies I spend a lot of time researching (but don't interpret this as me having a negative view of the stock-- I just have "no view"). Taking the time to read filings, as well as any investor materials these companies put out (with a critical and open mind, of course) goes a really long way.

cyral 4y ago

Here’s a chart of the historical average: https://www.multpl.com/s-p-500-pe-ratio https://www.multpl.com/s-p-500-pe-ratio

IshKebab 4y ago
Presumably higher average ratios correlate with lower interest rates though.
- xyzzyz 4y ago
  In fact, you should expect P/E and interest rates to be strongly inversely correlated, purely by the nature of what these things represent.

mupuff1234 4y ago

It seems like the average p/e shifted higher in the last 30 years, so maybe 15 is no longer the "correct" baseline to compare to.

francisofascii 4y ago
My gut says you are right, but why is 30 years a better baseline timeframe than 5 years or 100 years?

happythebob 4y ago

Right but this is MSFT and AAPL. They're not going anywhere. Inflation is.

kgwgk 4y ago
I don’t know where they are going but they were trading around ten times earnings less than one decade ago. A PE ratio below 15 may look at some point even more reasonable than the current PE ratio over 25.

300bps 4y ago

Agreed and not only that but he needs to take into consideration forward look P/E whereas he’s looking at trailing P/E. If interest rates go up, everyone is surmising that tech stocks that benefit from lower interest rates will not be as profitable. And of course if we have a recession…