No. of Recommendations: 9
For earnings, I'm using the average of trailing and forward numbers--a plausible estimate of what's going on right now.
The problem with your analysis is that P/E ratios have proven to be near worthless when valuing software-driven tech companies. You can't conclude any of them are overvalued by looking at P/E ratios alone and projecting them into the future. That's because you don't know what new multi-million or multi-billion dollar revenue streams they are in the process of unlocking by leveraging their current technology and customer footprint.
Unless you were in the board room, you couldn't have known in advance that Amazon would expand from selling books online to selling just about any item that can be shipped to your door through a vast 3rd party seller network, thereby more than 10x'ing their revenue in just a few years. You couldn't have known that they would create a multi-billion dollar subscription service called Prime that would then compete with Hollywood movies. You would have been skeptical when they first announced that they would offer a cloud service. No way you could project that service has grown to a $60 billion revenue run rate and expected to hit $100 billion in a few years.
Similarly, you couldn't have known what Microsoft's AI strategy was 10 years ago. You knew that Office 365 was doing well, and Azure was getting started. You now know that MSFT is the primary investor in OpenAI. Generative AI and AI in general is expected to have a $7T impact on global GDP. Yes, that $7 trillion, with a T.
Similarly, you can kind of speculate that Tesla will get into the Robo Taxi business and so will Uber. What will be the impact on world GDP when people have less of a need to own their own cars? Did you know in advance that Tesla would create a new $5 billion revenue stream just by opening up its charging stations for other car companies that they compete with?
Trying to be an accountant using a P/E ratio as a measuring stick in the face of disruptive forces like these is useless.
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.
As long as a stock has superior fundamentals, institutional support and other traits of market winners, the valuation doesn't really matter. Google parent Alphabet (GOOGL) famously reached a P-E ratio in the 50s and 60s while its share price went from 115 in September 2004 to 475 in January 2006.
The folly of P-E ratios was discovered when IBD founder and Chairman William O'Neil conducted research on what exactly caused stocks to explode in price. Strong earnings growth, especially in the two most recent quarters, was a key factor shared by these winners. But the P-E was usually well beyond acceptable levels when stocks began their big price advances. In fact, P-Es get even higher as the advance gains strength."
