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Comment by andrelaszlo | Hacker News Reader

I'm curious about investing and economy, and I always wonder about P/E ratios like Crowdstrike's (currently 450-something, was over 500 last week).

Some P/E ratios for today, for some companies I find interesting:

- Shopify: 615.12

- Crowdstrike: 455.70

- Datadog: 341.98

- Palantir: 212.34

- Pinterest: 187.67

- Uber: 99.0

- Broadcom: 77.68

- Tesla: 58.33

- Autodesk: 52.36

- Adobe: 49.23

- Microsoft: 37.97

What's going on here? Do investors expect Shopify, for example, to increase their earnings by an order of magnitude despite already having done extraordinarily well in a very competitive market? Can anyone ELI5?

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Former equity analyst here. Nobody on "The Street" is actually valuing these companies on PE ratios. Tech companies often intentionally re-invest earnings back into the business in real time and so their reported EPS is often quite low and a poor metric to evaluate the underlying business on. So instead, analysts typically use other metrics like EV/EBITDA or even P/Sales ratios in their valuation models.

Very generally speaking, trading these companies is kind of more of like placing a bet on whether or not their future top-line growth will be dramatically different than the market's current expectations.

The only common belief held by investors in a stock is that the price is going to go up. You may have value investors with a belief that Shopify is undervalued based on earnings, you may have investors betting that the rest of the market will buy Shopify, you may have people who’ve seen the line go up and decided to buy…

Stock prices have been decoupled from earnings or “value” for a long time now and that’s toothpaste we will never get back in the tube. We are in the Robinhood age where you can buy and sell a stock in seconds with no effort.

> We are in the Robinhood age where you can buy and sell a stock in seconds with no effort.

I read somewhere that retail investors are less that 10% of trades.

a fairly small volume of trades can still have a large impact on prices, no?

> Stock prices have been decoupled from earnings or “value”

No, they aren't, but the market can remain irrational for longer than you can remain solvent. It doesn't help that our dear government seems loathe to actually ensure competitive markets.

The greater fool theory: https://en.m.wikipedia.org/wiki/Greater_fool_theory

Essentially, investors buy as long as they think they will be able to sell at a higher price in the future, regardless of economic fundamentals.

> regardless of economic fundamentals.

not regardless, but only if. The future is unknown, so their bet is also based on that unknown. Is it foolish? Who knows. Did nvidia seem foolish if somebody made that bet before their ai boom?

You can also just say things you don't understand are always created by fools.

Now, there are some fools buying these stocks. But to say that each one of these has a high P/E because every shareholder is a fool is very reductionary.

> You can also just say things you don't understand are always created by fools.

Do you have a better hypothesis that would explain the extreme valuations of those stocks?

> But to say that each one of these has a high P/E because every shareholder is a fool is very reductionary.

That's not what "greater fool theory" means.

> Do you have a better hypothesis that would explain the extreme valuations of those stocks?

This isn't crypto, these are real, well run companies with good fundamentals.

The trade may be a bet that they are able to corner the market and extract more value. Maybe, it's wrong, but doesn't mean it's just empty hype.

> these are real, well run companies with good fundamentals

I'm not disputing that. But even "real" companies don't warrant P/E multiples in the three-digit range, unless there's a very good reason to expect them to grow their profits by 10x or more in the foreseeable future – and that has to be the expected value of earnings growth (roughly, the average growth over all possible futures), discounted by the time value of the investment.

P/E multiples over 100 are practically never justifiable, except as "someone else will come along and pay even more" – i.e., the greater fool theory.

Capture the market by not making customers pay full costs => low profits.

Grow revenues without substantially increasing costs (i.e running a loss)

Hope you can turn up the profit dial later.

Seems like the modern way?

Then, when the time comes...

https://news.ycombinator.com/item?id=41005904

Stock buybacks help push these up. Buybacks are a way to pay investors at capital gain tax rates instead of normal income (dividend) rates.

The enterprise value is 80.58B. The gross profit is 2.5B. 80/2.5 is 32, similar to Tesla stock.

The earnings are affected by how much the company reinvests (which shows up as a cost) before it becomes earnings on the accounting sheet.

TBH I don't think many figures here make any financial sense -- but I gotta hold it if my friends all hold it. And once everyone holds it no one is allowed to mass sell it because it's going to hurt your friends, and in finance that's a sin.

With numbers like that, either the market is crazy or the market believes the actual meaningful earnings are substantially higher than the GAAP reported numbers. Although even there the difference would have to be pretty big.

arm is also surprisingly high at 557.95x according to my broker btw. yet it's the only stock in my portfolio that reliably goes up.

Past performance is not necessarily indicative of future performance

30-50 is a reasonable PE range for larger companies.

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