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Issue link: https://digital.macdirectory.com/i/1488864
A little over a year ago, on March 1st, 2021, I tweeted a snapshot of the “FAANG” P/E ratios. They were: • Netflix: 88.63 • Amazon: 73.94 • Microsoft: 34.65 • Google: 34.75 • Apple: 32.89 • Facebook: 25.53 Today same companies have the following ratios: • Netflix: 19.34 • Amazon: 46.08 • Microsoft: 30.17 • Google: 22.35 • Apple: 27.79 • Facebook: 13.67 What a difference 13 months makes. Microsoft and Apple saw modest falls 13% to 16%. Amazon, Google and Facebook saw large falls in their ratios: 38%, 36% and 48%. Facebook (now renamed pitifully as “Meta”) in particular saw its valuation collapse by half! This is largely because in February the company forecasted lower than expected revenue growth in the next quarter, blaming privacy changes in iOS, macroeconomic challenges, and the market finally realizing that it’s an evil and despicable company. Microsoft and Apple grew their businesses nicely and have been resilient post-Covid. They are now revenue-reliable “blue chip” tech companies with large user bases that encompass high value, loyal customers. Google and Amazon are a bit more precarious given exposure to macro conditions and unclear new market opportunities but Amazon is still sporting a very healthy 46 ratio which is largely due to its investment-heavy approach to cash flow. But the star of the show, the real blockbuster, is Netflix. It fell from P/E of 88 to P/E of 19. Even six months ago the P/E was close to 70. What happened? Remember that P/E is an indication of growth potential. A P/E of 19 implies that the equity should be priced at 19 times last year’s earnings, which are roughly indicative of profit in a year and thus P/E is a time horizon: how many years would I wait before I got my investment capital back (and thus break-even). Well, one could say that a P/E of 13 or 19 (FB or NFLX) is pretty reasonable. It’s reasonable to pay that many years’ profit for a company. The large ratios only make sense if a company is growing rapidly. 20% to 30% growth can justify P/E of above 20. But what would justify a P/E of 88? The market has always given Netflix high valuation because it was growing and when the growth stopped the P/E fell to a more reasonable level. Unfortunately that means the share price had to fall over 70% from its peak. More than 40% in two days. Tragic. The stock peaked at $700 in October and is $221 now. Why were investors betting on high growth, just a few months ago? I think it was because investors like movies. And the Internet. Investors like movies and the Internet.