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Comment by freeqaz | Hacker News Reader

A lot of these companies have very reasonable P/E ratios now. Microsoft is sitting at around 27, Apple 25, and Facebook 15.

None of those strike me as "inflated". Those are normal values for the stock market (20-25). Are investors just panicking?

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If you've gotten used to paying $20 for a beer at Whole Foods, $5 may seem cheap until you realize the corner shop sells the same beer for $2.

Applying this analogy to our high inflation environment, those stocks seemed worth paying that high price per dollar of earnings, until the base interest rate started rising. Then you realized you can get the same return that your dividend yield provides by investing in a zero risk CD with no risk of losing the principle. Suddenly those stocks seem way too expensive for each dollar of earnings, and their price keep crashing until that price earnings ratio is something closer to the alternatives that the stock is now competing with.

> Those are normal values for the stock market (20-25).

Presuming your experience in equities markets is within the last decade...

Historical average is more like 15 for SPX.

If you're doing any fundamental analysis, you're going to end up doing one form or another of a DCF model. The expected rate of growth has a very big influence on your final estimated valuation, and it's normal for companies with a higher expected rate of growth to be valued at higher multiples.

Whether the rate of growth will be as high as expected, that is the real question, and it is not a simple one or one you can easily wave off.

Thanks bud. Have spent my career trading at hedge funds, with a major focus being US equities.

Then I'm sure I didn't tell you anything you didn't already know :)

I just had no way of knowing your background.

This has been what has been confusing me about the market for the past quite-a-while with regard to the tech stocks. Were some of them doing well? Sure. Were some of them basically money fountains that needed just a slight turn to prioritizing profits over growth to make lots of money? Sure.

But a lot of the tech giants were priced as if they had not already expanded into well over half the market, but as if they still had 99% of their market still in front of them and no competition in sight.

As of this time last year, it is not plausible that Facebook is extremely likely to continue growth like crazy and increase their revenues per customer by a factor of 10 or 50 or something. Sure, their whole VR play may pay off hugely, but I couldn't say it's extremely likely the way their stock said. Netflix was not going to grow their subscription base by 10x and/or charge their customers 10-50x more. Etc.

I mean, I guess it's within the range of possibilities for these companies, but these stocks were priced like it was all but guaranteed that these companies were going to see smooth sailing to levels of revenue I couldn't even remotely guess how they were ever going get to. How is Facebook, at this point, going to pivot into making $500/user/year from their current ~$20/user/year? And whatever your answer, what is the probability of that just smoothly working with no hiccups within the dollar-cost-value window it would have to take place in?

In the last couple of months, I've been getting my answer to this question, and my confusion has been resolving.

The devil is certainly in the details, and valuations are often overly optimistic...

But similarly, I believe there are a few really strong companies that are dramatically under-valued today, partly because they (purposefully and strategically) don't turn a profit yet, or because they trade at a very high multiple.

Facebook is not one of the companies I spend a lot of time researching (but don't interpret this as me having a negative view of the stock-- I just have "no view").

Taking the time to read filings, as well as any investor materials these companies put out (with a critical and open mind, of course) goes a really long way.

Here’s a chart of the historical average: https://www.multpl.com/s-p-500-pe-ratio

Presumably higher average ratios correlate with lower interest rates though.

In fact, you should expect P/E and interest rates to be strongly inversely correlated, purely by the nature of what these things represent.

It seems like the average p/e shifted higher in the last 30 years, so maybe 15 is no longer the "correct" baseline to compare to.

My gut says you are right, but why is 30 years a better baseline timeframe than 5 years or 100 years?

Right but this is MSFT and AAPL. They're not going anywhere. Inflation is.

I don’t know where they are going but they were trading around ten times earnings less than one decade ago. A PE ratio below 15 may look at some point even more reasonable than the current PE ratio over 25.

Agreed and not only that but he needs to take into consideration forward look P/E whereas he’s looking at trailing P/E.

If interest rates go up, everyone is surmising that tech stocks that benefit from lower interest rates will not be as profitable.

And of course if we have a recession…

I think there's some panic, yea, but the P/E doesn't tell the whole story. Take Facebook or maybe Google (just to pick on, others like Apple have their own headwinds to face) - how does advertising fair in a recession? Maybe the P/Es have retracted to look appealing, but here in about 2 years when ad revenue is down 30% those same P/Es look expensive.

Personally I think if you are investing with a longer-term horizon the next few years don't matter and if you like to buy individual stocks now is as good of a time as any.

Not a financial advisor and not financial advice.

Google has been around for 20 years so we can see what happened to advertising revenue during the last recession.

https://www.statista.com/statistics/266249/advertising-reven...

Which is definitely a piece of data to look at while making an investment decision.

One thing I'd recommend is asking how was Google as a company different in say, 2008 where revenues increased despite the recession compared to now.

Google was the cheap competitor to TV last recession. That's definitely not true anymore.

What about a recession would cause FB or Google to leave the advertising business, and not have some the largest advertising revenue whenever the recession is over? It is more of a choice can your money be invested somewhere better in the short-term and then hop back on to FB and Google before they get too expensive.

It is probably the same for all large tech companies. I don't see any titans falling in the next few years.

> What about a recession would cause FB or Google to leave the advertising business, and not have some the largest advertising revenue whenever the recession is over?

I'm not suggesting they would leave the advertising business, I'm suggesting revenues could be lower as advertisers cut their spend, which would drop Google/FB revenue and make the current 12 PE more like a 25 during a recession. I guess, you can't just look at P/E ratios. They don't tell you too much.

> I don't see any titans falling in the next few years.

Well, they've fallen quite a bit since January. Haven't they?

I don't see anyone going bankrupt or anything, so if that's what you mean then yea sure I agree - hence I think they're attractive to buy now as well.

They wouldn’t leave the as industry, but their revenue would suffer greatly.

A decent percentage of Google ad spend is waste/useless/whatever. So during a recession companies are probably tightening their ad spend and getting more precise.

25 for a huge tech company is insane, unless there is reason to expect burgeoning profits.

The implication is that if you bought them outright, they are going to generate the present level of profits for 25 years before you pay off your investment.

How many tech companies have lasted 25 years? How many will last 25 more?

25 makes sense for a startup with potential for explosive growth, not for an established company.

Lol. Tesla would like a word

>unless there is reason to expect burgeoning profits

>25 makes sense for a startup with potential for explosive growth, not for an established company

They are monopolies/oligopolies with pricing power. That is the reason.

Fair, but they are vulnerable to having the rug innovated from out under them like the holy-grail-of-investment railroad companies of yore. I wouldn't bet my retirement on the current crop of big tech companies lasting 20-30 years.

My intuition is that those are 3 of the select few companies that are not in a bubble. I would add Google and Amazon to that list too.

They make insane amounts of money and continue growing at a steady pace. Apart from Facebook, they have all shown the capability to expand into other verticals and successfully end up as major player on a consistent basis. This sets a high ceiling on growth despite being country sized already.

To me, most other big tech companies are inflated by the promise of ending up like these money printers and not because they have the money to show it. Uber, Doordash, Zillow, Airbnb, Netflix all have valuations that are completely disconnected with an 'average case outcome '. Don't even get me started on literal gambles like Lucid or Rivian which have 100b valuations. Stripe and Elon Musk Inc. might be the only recent ones to show successful ability to scale horizontally.

At the end of the day, the real way to make money is to provide real tangible value over the long term. Making money on the margins for someone else's labor is all well and good, but that runs into hard scaling limits fast. Even Google and Facebook know that the content creators are their value, and the customers are advertisers.

Nvidia, Unity, Cloudflare and similar companies with products with tangible value will survive most downturns. Non-ads based companies that extract value on the margin will struggle in this bear market.

> Nvidia, Unity, Cloudflare and similar companies with products with tangible value will survive most downturns. Non-ads based companies that extract value on the margin will struggle in this bear market.

Yes. Cloudflare was a very good buy signal 2 days ago. [0] Now it has gone up again. Most likely a short term upwards side, but I wanted to tell everyone about it, but I was downvoted to hell and beaten up for my correct Cloudflare signals. [0]

They should have listened, but instead they held all the way at the top. [1]

[0] https://news.ycombinator.com/item?id=31339476

[1] https://news.ycombinator.com/item?id=29355360

I love cloudflare. I see them becoming as big as AWS/Azure/GCP etc. They are moving fairly quickly but extremely deliberately and I agree with you that them being down recently has been a great time to buy.

I hate downvoters and hiveminds and sheep as much as anyone, but your comments had no substance whatsoever

For all I know, you kicked off 100 sock puppet accounts saying stuff like "Is this a buy signal?" "This looks like a sell signal. Thoughts?" about various companies at random, then picked a winner afterward and use it as proof that you're an investment genius

Maybe it'd be a different story if you said "I just threw $100k (50% of my portfolio) into Cloudflare shares, since this shows that they're a whatever, poised to blah blah blah"

Ad spend and retail tend to be strongly pro-cyclical.

Don’t rising interest rates put a downward pressure on p/e as growth (often) requires capital thus loans?

They do, but the biggest way this happens is investors shifting their asset allocations into bonds. So if bonds pay 10% per year a company with a p/e of 30 looks less attractive than if bonds pay 3% per year.

> They do, but the biggest way this happens is investors shifting their asset allocations into bonds.

The opposite is true actually, when rates go up there is a sell-off in bonds which is exactly what is happening right now where bond prices are down 10%-20%

You're saying if interest rates increased and stock price P/E remained the same most funds would allocate less money to bonds?

I don't understand why that would be. If the expected future cash flow of one asset increases (bonds), and remains the same for another (stocks) why would you allocate more money to stocks and away from bonds?

The future cash flow of existing bonds is fixed and it does not increase. If you have a bond that pays a 2% annual coupon you will see it's value drop when interest rates increase. The reason is that you can now get a newly issued bond that pays a higher (say 3%) fixed coupon so your's is worth less.

Your bond's price will drop to say 90% of the notional amount while the new bond will trade at 100% so they will effectively have the same "yield" of 3%.

The future cash flow of any given bond stays the same. But from an asset allocators point of view the cost of the future cash flow from a band decreased, making it a more attractive investment.

Bond trading is super complicated and unintuitive the way it's normally described

You're right though IMO, but people should be careful about trading on that knowledge until they're up to speed on how bond trading works

You're describing the same thing from different perspectives.

Bond prices are down, this means yields grow, and thus become more attractive investments than high P/E stocks.

I think the reason this sounds unintuitive is because the bond market isn't exactly a "free market" in the general sense. The Fed is manipulating the money market to set bond yields, so from a causative point of view, the yields rise first, which cause a drop in bond prices, which make buying bonds attractive for investors, who then, as a result, shift assets from stocks to bonds.

(disclaimer: just speaking from knowledge gleaned from, among all things, youtube videos :D definitely not an economist !)

Out of those I think Microsoft is the only one that isn’t sort of inflated. If Facebook disappears the world will hardly notice. If Apple does it’ll be hard to find a good laptop that can keep battery for 9 million years and it’ll be hard to find a “tech works out of the box so well that if you buy your grandmother/mother an iPad you’ll never need to do tech support again”, but still, it’s just a luxury brand.

If Microsoft disappeared the entire European public sector and most Enterprise companies in the world would cease to function. That being said, I would be some what comfortable owning Apple stock through the coming crash because they are likely to bounce back. I wouldn’t buy them at current market prices, but that goes for Microsoft as well. But I mainly put my investments into green energy on long term plans that tend to 4-6x the money over 7-10 years. Which isn’t where people who’d risk it with things like tech company stock are likely to gamble.

All three companies make healthy money though, as you point out, and that makes them pretty solid as far as this topic goes. I don’t even think Facebook/Meta is “inflated” in the bubble sense, I just don’t think it has a good future because legislation is coming after them big time; and unlike Microsoft and Apple, Facebook isn’t very diversified in its business models.

apple and google own all the phones in the universe

Is 20-25 really normal? I thought it was more like 5-15?

It completely depends on the expected rate of growth of the company. Even 100x can be fair for a very high growth company. For companies that don't have such great prospects, <5 may even be appropriate.

"PE should be close to X or between A and B" was always an extremely rough and imprecise heuristic, and it is no substitute for a real analysis with a DCF model.

A PE of 5 on a company that would grow or contract 0% for the next 100 years would be able to pay a 20% dividend for the next 100 years.

Depends on the interest rates and bond yields. 20PE is like 5% profit, which is better than most bonds in the past ~10 years if the business is stable. When yields rise it will become closer to 10-15.

5 is definitely an undervalued company unless the business is risky or expected to decline in profits.

Intel’s P/E is 7 right now. So, the other ratios do look inflated.

That’s because the market calculates a high probability of an Intel implosion

With an engineer on the helm, rehiring big names in the field, opening more fabs, and having access to TSMC's newest node over AMD[1].. it seems unlikely.

[1] https://www.extremetech.com/computing/334897-amd-might-have-...

If you know something the market doesn't know, and you're confident that you're right, then put all your eggs in that basket: that's how one beats the market.

(Don't follow this advice, I'm just a dude on the internet, this is not financial advice and my background is biochem + software, not finance)

I'd put my eggs in some Dutch company cough asml cough that has an enormous backlog and controls a segment of the manufacturing process ;).

But what do I know, I am just a grad student.

Not a bad long-term bet IMO! I’m partial to both ASML and TSMC.

ASML is a fantastic business to own but has a price tag to match. Intel might be good and is selling for a song.

Might help if people checked this out first - https://en.wikipedia.org/wiki/Kelly_criterion

Intel has to do next 4 years what it failed to do for the past 8 years and the complexity of execution in the space is getting harder and hander. Also, they are fighting on multiple fronts, upstarts in GPU, write-offs on AI hardware, Losing share of x86 with ARM et al. Losing share in x86 to AMD, having to rely on TSMC for advanced chips. Also, some bright spots where, they are opening up their foundries for design firms etc.

Over all, Intel has to do perfect execution and we did not fully talk about Apple, Amazon, Microsoft designing their own chips and using Intel's competition for fabbing them. They are in a tough spot, but if any company can come out of it winning, its Intel. They have done it before.

With the rise of AI chip startups (Jim Keller has one) and a voracious demand for chips, perhaps their fabs may allow them to weather the storm.

If I were putting money anywhere, it'd be in ASML... but their shares are too expensive for my poor grad pockets.

Yeah, I don't know how to feel about Intel.

Intel has been a crappy company to work for and doing a crappy job for a long time, but I'm willing to bet they still have enough highly-experienced geniuses on hand to pull through

Why?

They’ve got plenty of cash, and they’re still the strong leader in the server space. AMD is eating away at their consumer grade cpus I concede.

I would be shocked if we had an intel “implosion” they have a sustainable and successful business model and there’s no world where we need fewer processors.

AMD is probably making more progress in server right now.

"Implosion" is probably an exaggeration, but with AMD strong, and competitive ARM offerings (Apple silicon for end user devices, and Amazon with their own ARM processors on server), most people are speculating that they will eat into Intel's profit. The fact that Intel can't produce a competitive GPU in an environment where the GPU is becoming more and more important (for various reasons) is also something against them.

Blue chips and intel in particular always had low p/e

For some values of “always”. In 1972 Coca-Cola traded at 48 times earnings.

Intel has most of its (cpu) market right now so not exactly a growth stock. The market doesn’t believe in the new growth potentials (gpu, fabs). Intel also pays 3.3% dividend right now, not exactly a growth strategy. Also, the market may stay irrational for a while. Also, many investments are in the form of funds, etfs etc. so stocks will tend to move together, esp if in the same sector.

agree. I think now is a good buying opportunity for large cap tech

The issue is that when tech companies look reasonable, everyone and their mother buys in until they look unreasonable.

There is nothing else to believe in. We have one growth industry in this world and it’s tech. It’s not a bubble, it’s the economy running on one lung. You can deflate it and hold your breath, but once you need oxygen, you are going to fill it up rapidly from holding your breath that long.

The same is true for housing. We need other viable industries.

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