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Why are the P/E ratios of tech companies so large if earnings are down?
- sharemywin 4y agoHaven't they hit a saturation point? Do they continue to massively outperform the economy at large?
- AnimalMuppet 4y agoP/E ratios of tech companies are based on the expectation of future earnings. I mean, that's true of all companies, but tech in particular expects huge future earnings. A drop in current earnings doesn't necessarily move the price. It depends on whether people still expect the same future earnings. If they do, then the P/E goes up, because P stays the same and E goes down.
- sharemywin 4y agobut where is the "expectation of future earnings" coming from? is it just technical momentum? Is there some story I'm missing? are there markets they're going to take over they don't already have a significant share of?
- AnimalMuppet 4y agoWell... the market kind of does the aggregate of what everyone thinks (weighted by how much money they have behind their opinion). Initially, tech stocks had high P/E values because of the expectation of future growth of revenue. Now they have high P/E because everybody expects them to have high P/E... or maybe because everybody expects everybody else to expect them to have high P/E.
- sharemywin 4y agoso basically a bubble
- deleted 4y ago[deleted]
- taylorbuley 4y agotech firms have always maintained unique p/e levels reflecting investor confidence in their future prospects. if the numerator, price, is increasing at levels that outpace relative earning declines, the number keeps getting larger
- simonblack 4y agoObviously P/E ratios will be larger when the denominator, E, is smaller. It's just plain old arithmetic. The way to lower the P/E ratio is to drop the Price or increase the Earnings. In case you think the P/E ratio is just some fancy magic number for wannabe investors, the P/E ratio is the number of years it takes for the stock to earn you back the price you paid for it. That's why the smaller the P/E, the better that stock is.