@home, with no customers or revenues to speak of, but tremendous growth potential, just got a market cap of $2 billion.
Think for a minute about the simplistic way you are using P/E multiples. Why would you pay any multiple at all for CSRV? The company may not be here to generate any continuing earnings after next week or next month.
When you look at a P/E and express it in reference to next year's earnings, that is a simple shorthand for a sum of earnings going out several years. So we not only care about earnings next year, we care about earnings for the year after that and the year after that. You can see how those other numbers by growing rapidly can begin to add up to matter a lot more than only next year's earnings when we value a stock.
Perhaps this explains to you the mysterious variation you may have observed in the multiples of different stocks. Some have single digit multiples, some in the 'teens, some in the 20s, and so on. How can $1 per share of earnings have so many different values? Because even though we say X times next year's earnings, we were really going a little deeper than that. I'm sorry no one told you.
In the same way, perhaps I can clear up another one of those persistent mysteries you keep referring to: Intel. How can any company have a multiple higher than Intel's, since it is one of our greatest companies and the maker of essential technology. I love Intel. It is a great company. But assigning the multiple once again gets into that pesky issue of GROWTH. You may not have noticed this, but Intel is already pretty big. If they sign a $10 million marketing deal or $100 million deal, that doesn't add a heck of a lot to their percentage growth rate. A few more of those can really begin to add up for AOL, though.
You keep leaving growth out of the equation because your prediction is that AOL has already fooled the last subscriber or advertiser into signing up. I find that prediction to be fairly extreme, but that is the crux of your argument. So stick to it. Don't try to pretend that there is some law of physics that makes a P/E of 80 an afront to nature and something that can be dismissed out of hand as clearly absurd. |
