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Technology Stocks : America On-Line: will it survive ...?
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To: Brent D. Beal who wrote (5182)10/24/1997 9:44:00 AM
From: steve lipson   of 13594
 
>Based on it's price, investors must be assuming that AOL has more profit potential than MSFT, INTC<

Brent, as I have commented to you before, you are confused about the proper way to use P/E ratios. That ratio reflects valuation relative to earnings, essentially solving for the missing variable in the equation which is growth. Small cos. can grow faster than large behemoths, hence they can typically command higher P/E ratios.

The P/E ratio is not an academy award for outstanding achievement or the only indicator you need to look at to make a sound investment decision.

If you want to know how much overall earning power a company has, all you have to do is look at its market cap, the total that someone would pay to possess all the earnings.

On this basis, with well over $100 b each in market cap, INTC and MSFT are 12 to 15 times more valuable than AOL.

You can sleep soundly. All's right with the world.
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