PE calculation : amazon vs microsoft - what am I missing?

Discussion in 'Trading' started by smcoder, Feb 2, 2020.

  1. smcoder

    smcoder

    From tradingview's financials data I see the following

    Price
    MSFT -> 170.23
    AMZN -> 2008.72

    Net Income (FY) aka earnings
    MSFT -> 39.24B
    AMZN -> 11.588B

    Price to Earnings Ratio (TTM)
    MSFT -> 30.0769
    AMZN -> 81.2760

    Prices are latest, net income is on the fiscal year and PE is calculated on the trailing 12 months so they might not match perfectly but what I'm missing is how a company (AMZN) priced 12 times the other (MSFT) that has a net income more than 3 times less than the other ends up having a PE that is just below 3 times the other's.

    What am I missing?


    Thanks,
    sm
     
  2. Robert Morse

    Robert Morse Sponsor

    Year over year and expected growth of sales and earnings. An investor pays a multiple based on expected future earnings not past. High growth companies generally attract higher multiples.
     
    Last edited: Feb 2, 2020
    cvds16 likes this.
  3. SteveM

    SteveM

    There is a certain segment of the investing population that believes trees grow indefinitely into the sky, and that one day Amazon will own >50% of all retail sales in the United States, and by one day we will all own an Amazon fridge that automatically signals when you are out of milk to Amazon robots that automatically move goods through warehouses and Amazon drones that automatically deliver to your doorstep 20 minutes later - no human payroll expenses needed.

    Under such a scenario, it is possible to come up incredible future earnings expectations. The trouble of course, is that constantly delivering a >20% revenue CAGR becomes harder and harder as the numbers get bigger an bigger...for example, starting at $360B in annual revenue, means that next year Amazon will need to find a way to duplicate this years sales, plus add an extra $72B per year to it's topline sales number. Which is the equivalent of almost 3X Starbucks annual global revenue. This is how much new business Amazon must generate just to keep the CAGR story going. Good luck with that.
     
    Specterx likes this.
  4. Robert Morse

    Robert Morse Sponsor

    SteveM- I was not providing my opinion as to whether growth stocks are better than older mature companies. I was not providing a formula as best to compare them. I was just answering the question.
     
  5. themickey

    themickey

    MSFT imo is the better buy with a lower PE Ratio, pays a dividend and has a greater net margin return as well as lower debt. AMZN is propelled by hype imo.
    The public believe AMZN is a better buy because they are paying a premium via a higher PE, alas MSFT is more established and should have less volatility.

    AMZN is black bars, below index.png
     
  6. SteveM

    SteveM

    Absolutely, Rob. You are spot-on. I was just giving my opinion to OP, didn't even notice your response before I answered. Cheers.
     
  7. Robert Morse

    Robert Morse Sponsor

    What I would find more interesting, as this is a trading forum, not long term investing, is which is a better trading vehicle for Intraday and swing trades? I would think it would be best to watch both growth stocks and the old guard for momentum and set ups and not stick to one.
     
  8. smcoder

    smcoder

    @themickey I absolutely agree with you on msft being in a much better position to keep up the growth it's displaying. Anyhow my question was really about how are those PEs obtained having those prices and earnings and only now I realized that PE is really calculated on EPS not on earnings :)

    Thanks
    sm
     
  9. AMZN will be a good short AT SOME POINT. Not yet. Wait till the TSLAQ-style news stories start coming out. That's when you know the big boys are positioning.
     
  10. guru

    guru

    Since investors don’t want to be late to the game, they need to compete to get in first, and hopefully get out first.
    Getting in first means using forward P/E, which for AMZN is “only” 52 for 2021 and of course just estimated, but that’s where there is also room for assuming your estimate may be better than someone else’s. Who would’ve estimated that TSLA won’t be bankrupt by now?

    They can also make decision based on competitive analysis, meaning what other hedge funds at buying, while most of them are buying simply because they need to buy something, and there are only so many stocks available.
     
    #10     Feb 2, 2020