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Comment by RegEx | Hacker News Reader

I'm confused over the significance of the P/E ratio. It seemed like a big deal when I was reading these stories about the FB IPO, but then I got to look at other ratios in tech. Amazon's is much higher than FB's 93.72 at 175.23 [0]

[0]: http://www.google.com/finance?q=NASDAQ:AMZN&authuser=0

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Some interesting observations about Amazon's P/E ratio here http://www.mondaynote.com/2012/05/27/decoding-share-prices-a... on Jean-Louis Gassée's "Monday Note".

Basically, Amazon forgoes profit to get market share, will push out all competitors, build a huge barrier to entry with excellent execution and logistics, and then raise prices to increase profit. Traders are buying now and holding until that happens.

Supposedly. Everyone has been waiting for the big payoff since the 90s, but Amazon remains a stubbornly low-margin retailer. Eventually people are going to be forced to face the fact that there is no sinister Phase 2. Amazon is just happy being a low-margin, high-volume Walmart-of-the-Internet with little interest in its investors.

Oh, don't worry, the bears consider it out of whack and a good short as well.

I'm not exactly sure what the deal is with Amazon, but their p/e was much more realistic in the not-so-distant past:

http://ycharts.com/companies/AMZN/pe_ratio

P/E ratio is a terrible, meaningless way to evaluate the price of a share. It sounds remotely technical, and hey, there are numbers there so I guess people talk about it like it's important. P/E ratio is the ratio between profits to price per share. If the company had shares trading at $100 and their profits were $10/share, their P/E ratio would be 10. The thing is, P/E ratio doesn't capture expenditures very well, or long term corporate plans. So if a company is spending a ton of money trying to expand their business, they will have a really high P/E ratio. That doesn't make it a bad thing, just a measure of how much they're spending. AMZN is spending a ton of money lately, so they are not as profitable as they could be (and hence, high P/E ratio), but it is presumably to secure their future success.

> I'm confused over the significance of the P/E ratio.

Ratios have to be considered in context of expected future growth and expected future profit margin (revenue grows a little but profit grows a lot). Even considering that, some ratios seem extreme.

FB Forward P/E: 44.85

FB PEG Ratio: 1.67

AMZN Forward P/E: 85.52

AMZN PEG Ratio: 5.92

CRM Forward P/E: 69.06

CRM PEG Ratio: 3.29

One thing that is said about Amazon a lot is it sinks its profits into growing the business. That makes it more attractive as a growth stock since they are actively expanding their business into new areas, but affects their current bottom line with all the R&D overhead.

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