Question

Why do some companies such as Amazon deserve higher P/E multiples than others such as General Motors?

can you please explain, Im having trouble understanding what they are asking for.

Answer 1

P/E Multiple is dependent on a lot of factors other than Earnings per share such as:

1) Every different industry or sector gas different P/E Ratios based on different nature and risks of each industry. Taking current example, due to COVID-19 outbreak, automobile industry has suffered badly whereas Amazon has not. Because, auto industry is a manufacturing industry. It requires labour, and also a good economic conditions for demand. Whereas, Amazon or FMCG companies or Pharma companies will work well, irrespective of economic conditions.

2) Another aspect is the Future Growth Potential. A company with high growth potential in future will have higher PE Ratio.

3) There are some industries such as Metals that are cyclic in nature as they deal in commodities that are cyclic. So they will be valued accordingly.

4) The quality of management and promotors is also very crucial. As people believe in Jeff Besos, they will purchase Amazon ecen at higher PE which will keep its PE higher. Because PE is ultimately based on Price and Price is based on Demand or we can say Human Sentiments.

Therefore, PE Ratio is dependent on numerous factors which can not be defined theoretically or we can not genralise it for every industry or even every company. It is very Subjective calculayion based on various assumptions and judgements, which are obviously different for every person.

Therefore, PE Ratios can be significantly different for different industries and different companies.