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Comment by deadbabe | Hacker News Reader

I don’t get the whole P/E thing.

Do people basically say we shouldn’t bother buying anything with a crazy P/E more than 20?

Despite the fact that these high P/E companies are now making people lots of money? Wtf?

It's more that a high P/E means that the company itself needs to make a lot more money for the long-term shareholders to not be holding an investment that doesn't pay off in the end. You can still make plenty of money speculating on it as it's going up (so long as you sell), or short-selling it as it's going down, but generally speaking it's a sign that the business is being valued the assumption that it will grow by a lot, which is riskier (for example, Tesla's valuation more or less requires that they eventually monopolise the car market or enter and dominate some similarly large market. You can make an assessment yourself as to whether that's likely to happen if you want to make a prediction for how Tesla's value is likely to change over the long term).

Thank you for this well reasoned take.

A company with a high P/E is by definition not making much money for its shareholders, relative to the size of their investment.

Unless you mean that the share price may appreciate. That's absolutely a thing, but it's a dangerous game. Of course plenty of people have made fortunes this way; people have also lost fortunes; I think the advice to steer away from such companies is basically a statement about risk.

> Unless you mean that the share price may appreciate.

this has already happened because the P/E is high! Betting that it will continue to grow in price (aka, reach an even higher P/E) is risky.

Or it means that earnings are lagging the price increase. They just announced a 629% increase in earnings from a year ago (461% non-gaap) and it seems to be accelerating.

You need to “get it” because it’s really important.

We’re all in here arguing about PE ratios of tech companies reaching 100x. Is that too much? Who knows. For the best tech company in the world? What is the limit?

But for other companies like Tesla, their PE was once 1000x. That’s crazy town.

PE is the first number you should use for comparing two stocks to determine value vs risk.

Ok, but didn’t all FANG companies have insane P/Es at some point? Are you saying they were bad investments?

People get too caught up on the listed/current PE, but what matters is forward PE. The stock market is about the future, and growth company PEs as listed are always going to be behind.

High PE companies arent making tons of money for their shareholders, thats what a high PE means. Theyre making less per dollar of share than the average company

Some people care about PE. Some people don’t. It’s just one metric that represents past performance. If it’s high, the market believes the stock price will go up.

And to piggyback on this, these people may have between 0 and 100% understand of the core business.

For me personally, it’s a turn off.

No, P/E being high means the stock market thinks the company's income will grow by a lot in the future. The price may go up or down as those expectations for the future change (a high P/E stock can announce record profits and have the stock go down, if in fact the stock was being priced on the expectation that the profits would be higher than announced).

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