Comment by bitreality | Hacker News Reader

Comment by bitreality | Hacker News Reader

"But if Netflix and Walt Disney both use technology to stream video, why is only Netflix trading at infinity-times earnings? And if Tesla and BMW “both use battery technology to power luxury cars,” Deluard writes, “why should the former trade at 42 times forward earnings when the latter fetches 5.6 times trailing earnings?” Good question."

Incredibly flawed argument. BMW's earnings come from a huge variety of products and services. Not purely battery-powered electric cars. Tesla's entire business model is producing battery-powered vehicles.

So to compare each company's P/E directly under the assumption that they are both making identical products would be wrong. Instead you would need to somehow isolate the P/E ratio of BMW's battery-powered car business in order to draw a meaningful comparison.

In general, this article is trying to group all of tech into one basket and draw conclusions which apply universally. A company has a high P/E ratio for a very simple reason: investors believe its earnings growth will outpace the market. That will seemingly always be true for companies which are focusing on growth over profit.

You are technically correct, but the author still gets the important point right. The premium in valuation between these companies should and will shrink (unless there is a reason to believe that Netflix will kill Disney or that Tesla will be dominating the automotive market at the expense of Fords and Toyotas.

The high P/E values for these companies are usually giant signals they are overvalued.

Probably the only company that can legitimately sustain a ridiculous P/E is Amazon, and it’s because Amazon is the only large company willing to try weird shit and actually take product risks. I’m not a big fan of Amazon’s company culture, but I have to hand it to them that at least they try to do shit and see what works. Most companies beyond a certain size fall victim to in-house risk aversion through manager ranks to such a high degree that all innovative ideas are killed and only incremental product changes are allowed.

P/E is a backward focusing metric, stock price is a forward looking metric. So, unless the company is static they don’t correlate that well.

Look a BMW’s shrinking US / EU sales for the last several years and compare that with Tesla. You don’t want to pay a premium for a sinking ship do you?

PS: The stock market may be irrational, but it’s rarely dumb.

This sounds tone deaf to me. Having worked in quant finance myself for many years, I can safely assure you that investors look at price to intrinsic value metrics as a way to gauge overpriced stocks, not as a consensus metric of belief over future earnings.

For underpriced stocks the correlation is more obvious.

I’d you see a P/E of 5 that’s not a good sign.

Not true. For example, in low-beta investing, low P/E values for some sectors are super common, and seen as a sign of a deal on an undervalued stock.

A P/E of ~10 is a value stock. Entravision Communication has a P/E of 2.11, that’s not a suggestion that it’s going to keep that ratio over time.

Sure, ultra low P/E is a reason to investigate, but it’s not inherently a good sign. A common cause is a company splitting which makes the old P/E meaningless.

I agree nothing is inherently a good or bad sign, there’s no deterministic rule for where to find stock returns. I was just disagreeing that high P/E is commonly veiwed as a positive signal of future earnings.

BMW sales do not seem shrinking to me: They boast 35 consecutive quarters of growth [1] and sold more cars year over year, at least in 2014-2017 [2], don't know about 2018, as it's not yet in the statistics.

[1] https://www.press.bmwgroup.com/global/article/detail/T028306...

[2] https://www.statista.com/statistics/264342/global-sales-volu...

Global numbers look fine, US and EU numbers don’t.

  US:
  2017	305.685	1,77%
  2016	313.174	1,79%
  2015	346.023	1,98%
  2014	339.738	2,06%

Looks like 2018 numbers are up slightly in the US, though still below 2016 sales.

2018 311.014 1,79%

http://carsalesbase.com/us-car-sales-data/bmw/

Tesla is effectively a battery company with an automobile division.

The applicability of Tesla’s batteries beyond automobiles (such as grid-level storage in South Australia) justifies the high valuation.

Looking at Tesla purely as a car company misses much of the bigger picture.

Reply on news.ycombinator.com