Ask a Fool: What Do You Need to See to Not Worry About P/E Ratios?

By Brendan Mathews – Apr 15, 2014 at 11:05AM

NASDAQ: AMZN

Amazon

Market Cap

$1,836B

Today's Change

(-1.64%) -$2.95

Current Price

$176.59

Price as of April 24, 2024, 4:00 p.m. ET

Sometimes a high P/E ratio is a big red flag to stay away from a stock, and other times the market ignores P/E altogether. How can investors tell the difference?

In this edition of The Motley Fool's "Ask a Fool" series, Motley Fool One analyst Jason Moser and Motley Fool Stock Advisor analyst Brendan Mathews take a question from a reader who asks: " When a company has a triple-digit (or N/A) price-to-earnings ratio, such as Amazon.com (AMZN -1.64%) or LinkedIn (LNKD.DL), what do you need to see from it to make you not worry about value?"

Brendan points out that for high price-to-earnings stocks, much of the value of the company is based on its future earnings. As such, he looks for three key things from those types of stocks: a large market opportunity and a high level of sales growth, a compelling and disruptive business model, and a crack management team. Jason agrees, and he also likes to look at cash flow, as opposed to earnings. Both Brendan and Jason agree those things are in place for both Amazon.com and LinkedIn.

Brendan Mathews owns shares of Amazon.com. Jason Moser owns shares of Amazon.com and LinkedIn. The Motley Fool recommends Amazon.com and LinkedIn. The Motley Fool owns shares of Amazon.com and LinkedIn. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.