PE: The valuation game
One of the ways to value a company is to multiply its earnings with the PE Ratio of its peers in the markets. PE is Price to Earning ratio. For example if a companies stock price is US$ 10 and earning per share (EPS) is US$1 then the PE ration is 10/1 = 10. If the companies earnings are US$100, then the value is US$1,000 Earnings x PE (100X10)
EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E).
Let look at the PE of leading cloud company Amazon and how it stacks up against its peers.
Amazon: 300
Google: 19
Ebay: 16
Apple: 15
Microsoft: 15
IBM: 14
Is it unusual to see Amazon at 300 PE and its other peers at 14-19 ? Let me know why you think so.