Subject: Re: OT: big companies
I side with mechiny on this subject. P/E's for high growth companies are deceptive. I highly recommend reading Where the Money Is by Adam Seessel. His discussion on the earnings power of Amazon (chapter 8) is an illustrative example on this topic.

To be clear, the issue here is not the high P/E (low earnings yield) of high growth companies.
It's the ratio of distant future earnings to price today.
Would you consider that ratio misleading or not worth consideration?

A high current P/E (low current earnings yield) is not a problem at all, provided the earnings eventually arrive to justify the value of the firm.
After all, the whole idea of not worrying about current earnings from a growth company is that you'll get lots and lots of them later, which is fine.

But if the earnings don't eventually arrive, the only way to get a good investment outcome is if the market is still assigning a very high multiple in the distant future: it's still trading at a very low earnings yield.
That certainly does happen.
But it doesn't happen frequently, and the exceptions can not be identified in advance by mere mortals, which is why the average outcome from is so very poor if you overpay for future earning power.
Spotting today's optimists is easy, but spotting the things they will be very optimistic about a decade from now can not be done reliably.

It's interesting that so many people cite Amazon as the reason for not worrying about a company ever having any profits even far into the future.
It's by far the most famous example of an exception to the general rule of valuation multiples eventually falling to the teens, and so far Amazon investors have done very well indeed: good for them.
What's interesting is that, in any given year, the current Amazon investors generally DO expect substantial profits within a few years. Check out the consensus expectations written many years ago.
Time goes by, and the substantial earnings don't arrive. Past investors were flat-out wrong in their investment thesis.
But optimism holds, so today's investors now expect substantial earnings in a later year, leading to still-high multiples. This whole process then repeats.
So, this should not be cited as an example of the wisdom of not expecting far-distant profits. Amazon investors have never on average been like that: profits have always been expected quite soon.
It's an example of doing well even when you're wrong about your expectations for distant future profits, but then being saved by future optimists you couldn't have (and didn't) predict.

As usual, the current forecasts for Amazon's future earnings are quite substantial. A typical expectation for 2030 is $20 EPS. Today's price is only 6.6 times that future number, far below my usual threshold of 10x for a firm to be a likely good investment based on solid future earnings.
Broadly speaking, there are three possible outcomes for today's Amazon investors:
* Those expected earnings arrive. The current investors do well no matter what level of optimism Mr Market has about them 5-10 years from now.
* Those expected earnings do not arrive. Amazon investors rewrite their memories once again, and future investors bid it up to a high price expecting big profits to arrive in 2035 or 2040 instead.
Today's investors still do fine, provided those future optimists exist.
* The firm is trading at a relatively normal valuation level for a firm with their growth rates, and today's investors do poorly.
As a random example, maybe the company might be trading at 22 times net earnings averaging around $4, and today's investors lose 1/3 of their money.

I'm not saying which outcome is most likely. I don't have a strong opinion on the matter.
I'm merely pointing out that today's investors will do well only if (1) future earnings are solid relative to today's price, or (2) future multiples are still very optimistic after the years of earnings disappointment.
For any company other than Amazon, outcome (2) is very rare.
Which is why I keep suggesting that investment works best (even in profitless high growth firms) when choosing things that you're pretty sure will offer outcome (1).
That is, a low ratio of current P to distant future E.

Jim