You know....that's a good question. Historically speaking, P/E ratios that high just aren't normal. In fact, way out of the norm. It would be going against about 100 years of cumulative data and 3 years or so of stratospheric P/E's just doesn't make it OK all of a sudden.
The other part is that it's a number closely tied to the number of shares and the earnings as it implies. Think about it....you value a company by how much money it can make. The more it can earn, the more valuable it is speculated to be, but those shares are part of a company's "liabilities". You own them, and if a company wants them back they have to pay for them. If a company would want to go back private, that would mean they would need to repurchase all the outstanding shares. Obviously, no company carries that kind of cash to buy back their entire market cap, so it would have to be done with the profits it earns over a period of years. If earnings and share price remain constant, a company with a P/E of 10 could buy back it's entire outstanding shares with the profits earned over 10 years. That's quite a long time.
Now let's take PDLI....it would take them 6425 years to buy back all their shares with their profits if earnings and share price remained constant as they are now. Now that is just not feasible.
There is no situation that warrants a higher P/E and share price SHOULD be tied to a companies earnings, not speculation over growth. Why? Because you never know what will happen in the future, and growth is not a guarantee. Speculation has driven prices up in hopes of continued high growth and now look what happened to earnings. unfortunately, earnings have fallen faster than prices and the recent rise has made it worse. |
