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Comment by anactofgod | Hacker News Reader

Wrt "...the E you use to calculate P/E should actually be the long term expected earnings"...

You may be thinking of Forward P/E. But Forward P/E only attempts to project earnings out 12 months.

The E in P/E is the measure of actual earnings over time. The P/E ratio is, quite literally, the number of years required to pay back a stock's purchase price at constant dollars and earnings. AAPLs P/E ratio indicates it would take AAPL 10 years to pay back its current stock price. GOOG's indicates 20+ years. AMZN's P/E ratio indicates it would take over 3000 years to do the same.

You may be right, and AAPL's P/E ratio may be closer to 5 than where it is currently (where the drop comes from a lower stock price). But then, so should AMZN's.

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Wrt the "the E you use to calculate P/E should actually be the long term expected earnings" comment I made..

I was not trying to say that the standard financial metric called P/E ratio should be calculated this way. Rather I think that ideally or principally it should be calculated this way, because what matters is "how many year will it take for me to recoup the money?", not "how many years will it take for me to recoup the money assuming that the company's earnings remains the same?".

But obviously you don't know the company's future earnings, so to make an actually computable metric you can only use the current earnings as an estimate.

"The P/E ratio is, quite literally, the number of years required to pay back a stock's purchase price at constant dollars and earnings."

Yes, this is what I mean. I'm no expert on stocks and am not familiar with the terms, but the principle should be there.

Say the "normal" P/E is around 15, which means that people think it's fair to be able to recoup the stock's price in 15 years. Now why Apple's P/E is only 10? That's because people think its future earnings will drop (in statistical sense), so that the current price will still be recouped in roughly 15 years. Similarly, Google's P/E is 20+ because people think its future earnings will rise, so that again the current price can be recouped in roughly 15 years.

Amazon's large P/E isn't that abnormal if you consider that there are plenty of companies which are losing money yet still have a positive stock price. Maybe they have lots of assets, and maybe people expect them to return to profitability soon.

For struggling large companies this can even be a gamble. If you think the company has a 5% chance of returning to glory and earn big, and 95% chance of never earning a profit again, the company can still have a pretty decent expected future earnings in statistical sense.

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