Todd Sullivan Explains PE Ratios to the Troglodytes

I’ve seen an amazing amount of unqualified opinions being offered regarding LinkedIn’s IPO valuation from people who have absolutely no business even discussing these things, let alone presenting themselves as experts.  This is not to say that either the Overvalued Camp or the Undervalued Camp has a monopoly on the truth – but if you don’t understand multiple compression and its undeniable impact on even the growthiest stocks, then please do us all a favor and just STFU.

Thankfully, Todd Sullivan has just unleashed a magnum opus of a post on why PE Ratios – in the end – ALWAYS matter, no matter what the stock in question might be.

Saw a few tweets today in regards to LinkedIn’s ($LNKD) IPO that simply said “PE is a horrible way to value a company”.

That’s a crock…

Eventually, it matters very, very much. Two thing happen when a stock trades at an atmospheric PE for a long time. Either it stalls until earnings catch up to it….OR it comes down to a reasonable PE level. Lets look at at some examples. I’ll use two with $GOOG and $DELL but we could just as easily use $YHOO, $MSFT, or any other tech high flyer for that matter.

I’m going to ask that you get over there to read the entire thing, it is one of those lessons that will stay with you always.

By the way, we went into the 2001 recession at a 30 PE on the S&P 500…even though earnings had grown since then stock prices have essentially gone nowhere.  The growth of a stock’s (or market’s) “E” is only as important as the “P” that someone is willing to assign to it.

Source:

Yup, PE Does Matter….  (ValuePlays)