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Comment by jeffreyrogers | Hacker News Reader

Amazon stock trades at a P/E of 910. S&P 500 average is currently around 19-20. Do you really expect Amazon to continue to grow at such a rate that its current P/E is justified?

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Remember: it's the price-to-earnings ratio and not price-to-revenue ratio.

Amazon's stock trades at a P/E of 910 exactly because it's deferring profit to continue growing its revenue. At some point it's going to stop investing its revenue into growth and start realizing a profit on that revenue. At that point the P/E will come down.

Or perhaps P/E is not the end-all-be-all of metrics for judging value?

I completely agree, however, it is still a useful metric. And when a stock has a P/E of 910 the growth rate that the underlying business must grow at in order to justify such a price is astounding.

P/E approaches infinity as you near "break even", so for a company like AMZN with both massive revenues and expenses, P/E is not useful when the two are almost equal. You must dig further and look at things like cash flow, revenue (not earnings) growth, operating margin (not profit margin), etc. These things give a much clearer picture than an odd-looking P/E. If a company with high P/E had operating margins that ware closer to profit margins (not triple, like AMZN) I would be a bit more concerned.

If capital expenditures are reduced just a bit, or if margins are improved slightly, the E part of the fraction will jump and P/E will fall massively.

All of that being said, there are still plenty of things that could go wrong for AMZN.

Earnings are profits, profits are retained in the company. A simple look at the P/E ratio tells you very little without understanding the broader context.

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