4 ms·

P/E is only one metric and it's potentially very deceptive. You're using a PE that's uncorrected for expenses that are essentially investment in future business

P/E is only one metric and it's potentially very deceptive. You're using a PE that's uncorrected for expenses that are essentially investment in future business growth rather than a fundamental part of the business model. Amazon, for example, is hiring tons of new employees to build out its AWS business; that's a positive sign (it shows they believe that's a good investment) but in the short term it will drive down their earnings, because the cost of those employees is incurred now in exchange for business in future years. So with Amazon, you have a denominator that's growing, and a numerator that's depressed by the investment in growth. That results in a very high PE. MSFT and Apple, by comparison, are great companies but the market isn't expecting them to grow a lot (esp given how big they already are.) They're priced at a level where the market basically expects their earnings to stay steady going forward. 30X earnings is still not cheap for a tech company. It's in a spot where you'd have to look at the growth prospects, etc. to decide if it's a good deal. PE makes the most sense if you're comparing very mature companies with similar size, growth and operating metrics. If that's not the case, it's not very useful.

wiredfool 15y ago
Right, but Amazon is in a heavy infrastructure, heavy competition, low margin business. And their margins are small and getting smaller. 2% or so IIRC. They're less poised for explosive growth than Apple. On the other hand, they're here for the long haul. Apple is spending a lot on infrastructure, but they're in a lower competition, high margin business. 38% margin IIRC. (yes, there's competition. But Amazon's competition is anyone selling anything, and Apple's is anyone who's managed to make a good smartphone.) The market hasn't been expecting Apple to grow for years now based on PE, they've been under 20 since the 2008 crash and growing their earnings like crazy. Their PE at the low point was 11ish, and now it's 14ish, less than the historical SP500 valuation. For Comparison's sake, last quarter, Apple earned 6.8 billion. Amazon's net sales were 9.9 billion. Pretty soon, I'd expect Apple's profits to be bigger than Amazon's sales. Something's not rational here. Might be me. Might be the market.
- tomkarlo 15y ago
  "Right, but Amazon is in a heavy infrastructure, heavy competition, low margin business. And their margins are small and getting smaller. 2% or so IIRC." Amazon's gross profit ran north of 20% last quarter. (http://www.google.com/finance?q=NASDAQ:AMZN&fstype=ii http://www.google.com/finance?q=NASDAQ:AMZN&fstype=ii) They're a dominant player in both online retail and cloud services, they're now providing cloud services to government entities, and they're growing like crazy. They're hiring like crazy and that's driving down their net income (I think they hired like 30% of their employees in the past year.) The market clearly believes they're on their way to double or quadruple their business over the next few years as more shoppers go online and more services go to AWS. Apple is doing great, but they're 4X the size of Amazon in terms of market cap, and arguably at their "peak" in terms of everything going their way. They're going to keep growing, but they're already the largest company by market cap... are they likely to double? The market doesn't seem to believe that. Is that right? I don't know... it just seems to be what the pricing currently indicates. Edit: It's also worth noting that spending on infrastructure does not have the same effect as spending on employees. Infrastructure costs are spread out over the life of the equipment, whereas payroll is expensed as incurred.
  - wiredfool 15y ago
    I'm totally in agreement about Apple being big, and I don't see them becoming 4x bigger than the next largest company. I think, from a financial POV it would make sense to spin stuff off, so that each part has a chance to become as big as the whole. From a synergy POV, that's daft. Apple gets a ton of benefit from being one unified whole. Apple's big issue now is to avoid replaying the sideways fall of microsoft in their own way. Amazon's cloud services are small, looking like estimated 750 million this year vs something like 40 billionish sales for the year. Their expenses look roughly consistent on a yoy basis, the last couple of quarters are pushing up the r/d spending, but that's possibly the difference between quarterly revenue (strong variation within the year) and a constant increase in r/d. That might be shaving a bit off, but it doesn't change the nature of their business. Amazon makes most of their money selling other people's physical goods. They mark them up. They are competing on price with WalMart, Target, and the wholesale club stores. On the other hand, they're competing well with local businesses by shipping stuff for free and providing a consistent customer experience. They're totally different companies. My rational expectation is that Amazon would be a low PE stock, and Apple would be high. I'm not going to short things waiting for the market to come around to my sense of rationality.

wiredfool 15y ago

Right, but Amazon is in a heavy infrastructure, heavy competition, low margin business. And their margins are small and getting smaller. 2% or so IIRC. They're less poised for explosive growth than Apple. On the other hand, they're here for the long haul. Apple is spending a lot on infrastructure, but they're in a lower competition, high margin business. 38% margin IIRC. (yes, there's competition. But Amazon's competition is anyone selling anything, and Apple's is anyone who's managed to make a good smartphone.) The market hasn't been expecting Apple to grow for years now based on PE, they've been under 20 since the 2008 crash and growing their earnings like crazy. Their PE at the low point was 11ish, and now it's 14ish, less than the historical SP500 valuation. For Comparison's sake, last quarter, Apple earned 6.8 billion. Amazon's net sales were 9.9 billion. Pretty soon, I'd expect Apple's profits to be bigger than Amazon's sales. Something's not rational here. Might be me. Might be the market.

tomkarlo 15y ago
"Right, but Amazon is in a heavy infrastructure, heavy competition, low margin business. And their margins are small and getting smaller. 2% or so IIRC." Amazon's gross profit ran north of 20% last quarter. (http://www.google.com/finance?q=NASDAQ:AMZN&fstype=ii http://www.google.com/finance?q=NASDAQ:AMZN&fstype=ii) They're a dominant player in both online retail and cloud services, they're now providing cloud services to government entities, and they're growing like crazy. They're hiring like crazy and that's driving down their net income (I think they hired like 30% of their employees in the past year.) The market clearly believes they're on their way to double or quadruple their business over the next few years as more shoppers go online and more services go to AWS. Apple is doing great, but they're 4X the size of Amazon in terms of market cap, and arguably at their "peak" in terms of everything going their way. They're going to keep growing, but they're already the largest company by market cap... are they likely to double? The market doesn't seem to believe that. Is that right? I don't know... it just seems to be what the pricing currently indicates. Edit: It's also worth noting that spending on infrastructure does not have the same effect as spending on employees. Infrastructure costs are spread out over the life of the equipment, whereas payroll is expensed as incurred.
- wiredfool 15y ago
  I'm totally in agreement about Apple being big, and I don't see them becoming 4x bigger than the next largest company. I think, from a financial POV it would make sense to spin stuff off, so that each part has a chance to become as big as the whole. From a synergy POV, that's daft. Apple gets a ton of benefit from being one unified whole. Apple's big issue now is to avoid replaying the sideways fall of microsoft in their own way. Amazon's cloud services are small, looking like estimated 750 million this year vs something like 40 billionish sales for the year. Their expenses look roughly consistent on a yoy basis, the last couple of quarters are pushing up the r/d spending, but that's possibly the difference between quarterly revenue (strong variation within the year) and a constant increase in r/d. That might be shaving a bit off, but it doesn't change the nature of their business. Amazon makes most of their money selling other people's physical goods. They mark them up. They are competing on price with WalMart, Target, and the wholesale club stores. On the other hand, they're competing well with local businesses by shipping stuff for free and providing a consistent customer experience. They're totally different companies. My rational expectation is that Amazon would be a low PE stock, and Apple would be high. I'm not going to short things waiting for the market to come around to my sense of rationality.