Tech: All it’s Cracked Up to P/E? *** INDUSTRY FOCUS *** | Summary and Q&A

TL;DR

Tech companies with high P/E ratios can still be attractive investments if they are in nascent markets and have strong growth potential.

Key Insights

• 🥳 Tech companies with high P/E ratios often operate in nascent markets with significant growth potential.
• 👀 The Rule Breaker investing philosophy looks beyond traditional valuation metrics and focuses on growth and innovation.
• 💪 Unprofitable tech companies may be undervalued if they are investing in innovation and have strong competitive advantages.

Transcript

Dylan Lewis: This episode of Industry Focus is brought to you by Rocket Mortgage by Quicken Loans. Rocket Mortgage brings the mortgage process into the 21st century with a fast, easy, and completely online process. Check out Rocket Mortgage today at QuickenLoans.com/fool. Welcome to Industry Focus, the podcast that dives into a different sector of ... Read More

Questions & Answers

Q: Why do tech companies often have high P/E ratios?

Tech companies invest heavily in growth and innovation, which reduces their reported earnings and inflates their P/E ratios. However, this investment can lead to significant long-term gains.

Q: How do tech companies with high P/E ratios justify their valuations?

High-growth tech companies often operate in nascent markets with significant growth potential. Their valuations are based on investors' expectations of future earnings and market dominance.

Q: How does the Rule Breaker investing philosophy view high P/E ratios?

The Rule Breaker philosophy looks for companies with high growth potential, even if they have high P/E ratios. These companies are considered undervalued if they are investing in innovation and have strong competitive advantages.

Q: What other metrics can be used to evaluate tech companies with negative earnings?

Price-to-sales ratio can be a useful metric for unprofitable tech companies as it reflects their revenue growth potential.

Summary & Key Takeaways

• P/E ratio measures a company's current share price against its per share income, either on a trailing twelve-month or forward basis.

• Traditional investors often view high P/E ratios as a sign of overvaluation, but tech companies in nascent markets may have high P/E ratios due to investment in growth.

• Amazon and Salesforce are examples of companies that were unprofitable when initially recommended but have subsequently experienced significant growth and market dominance.

• Veeva Systems, a cloud-based CRM software provider, is an example of a nascent tech company with high growth potential.