Subject: Re: OT: big companies
For earnings, I'm using the average of trailing and forward numbers--a plausible estimate of what's going on right now.
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The problem with your analysis is that P/E ratios have proven to be near worthless when valuing software-driven tech companies.

Um, nope, not buying it. It's not different this time.

Recall that I am talking about a collection of firms with a collective market cap over $11 trillion, not a single software startup.
But ignore that.

The only reason for a firm to have a low earnings yield now is because people expect (and deserve) lots of earnings later. It makes sense.
It can't be forever postponed, because people will eventually stop believing the forever-delayed hyped future.
Eventually, the profits have to arrive, or the price will fall along with the strength of belief.
Low earnings now aren't a problem; low distant-future earnings relative to price now is a big problem.

If even the purchaser doesn't believe in biggish future profits, but rather relies on a future optimist to buy from him at a high multiple because of the assumed high profits in an even-more distant future, the purchaser today is (statistically) very likely to be disappointed.

The key insight is that the future eventually arrives. No firm trades at nosebleed valuations forever. The valuations will fall to earth with 100% certainty; the only question is the time frame.
Especially if they already account for a visible fraction of all national business activity.
(one simple proof: the value ultimately comes from the future earnings, which have to come from the future sales.
Neither sales nor net margins can grow forever faster than the economy upon which they depend. Though most firms hit the growth rate wall very much sooner than that)

I have no doubt that some few of today's high flyers of various sizes will still be trading at high valuations of future earnings more than ten years from now.
However, I am willing to assert with confidence that nobody knows which ones those are with sufficient certainty to be sensible betting cold hard cash on it.
Everything is easy with hindsight. Very little is easy in advance.
It was blindingly obvious that Microsoft was a great buy at 76 times earnings 23 years ago, but...wait...no it wasn't.
Despite the fact that the business did extremely well, it was trading at single digit multiples of much higher earnings within a decade.
That was an overshoot, but a descent into the teens was completely predictable.

And you don't have to take my word for it. Here's a snippet from William O'Neill, the founder of Investor's Business Daily:
"Decades of market research finds that winning stocks tend to have P-E ratios that value investors consider too expensive ' even at the start of their giant price runs.

This is a fine statement, but 100% backwards looking.
It's like saying that every single lottery winner was a purchaser of lottery tickets.
True, but without predictive power: lottery tickets will lose you money on average.

The average firm that did very well had a high multiple at the outset? Fair enough. (though not always true)
But prospectively, what is the average long run rate of return of firms purchased at very high multiples? It's negative.
Or perhaps merely very low, depending on the precise test set-up.

Trying to be an accountant using a P/E ratio as a measuring stick in the face of disruptive forces like these is useless.

Again, no.
I'm not measuring a firm based on its price to earnings ratio, but on its price to FUTURE earnings ratio--many years out. There's quite a difference.
I have put lots of money into as-yet unprofitable businesses...but never into businesses that I didn't see a probable path to solid future earnings that look good relative to the price paid at the start.
I'll pay a bird in hand for two in the bush. But those willing to pay three or four birds in hand for two in the bush will do badly on average.

But it's good to see that the tech bubble mentality isn't dead : )
In order for some folks to beat the market, it's necessary for there to be other investors who underperform it.
More often than not, they are the overoptimistic ones who are willing to overpay for a rosy future because we old-fashioned folks just don't get it: we keep stubbornly insisting that a business eventually has to be worth what we pay for it.

Bottom line, going into an investment and expecting the ability to sell 7+ years down the road at a very high multiple of future earnings is a recipe for disappointment.
If the earnings don't come by then, those future optimistic buyers are usually very thin on the ground.
There isn't any need to require current earnings from a business, but it's usually best not to overpay for what you yourself believe their future income will be.
If you pay today over 15 times what the earnings turn out to be a decade later, you'll have a poor return with very high probability.

Jim