Why P/E Ratios Are for Losers
Of course, you could make the argument that Netflix is taking the same type of approach I laud Amazon and other growth companies for taking. But, after all that has happened with Netflix over the last year, can you honestly say that you could take this excerpt from Jeff Bezos's letter to his shareholders and apply it, with even of a fraction of the confidence, to Netflix:
We believe that a fundamental measure of our success will be the shareholder value we create over the long term ...
Our decisions have consistently reflected this focus. We first measure ourselves in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise.
Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently than some companies. Accordingly, we want to share with you our fundamental management and decision-making approach so that you, our shareholders, may confirm that it is consistent with your investment philosophy ...
We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
The answer is obvious.
But, there's something more important than that answer. If you look to a P/E ratio and short stocks like AMZN, CMG and LULU on the basis of valuation without considering the validity and sustainability of their business models, you have lost big over the last year. In this case, I think past performance will be indicative of future results.
If you shorted 100 shares of Netflix at this time last year, you're sitting on a gain of roughly $13,832. And that number was higher, at most times, during Q4 in 2011. If you did the same with the other three stocks, you would not have done quite so well. In fact, you would have lost several thousand dollars.
AMZN increased in price from $183.87 to $189.98 between April 20, 2011 and April 20, 2012. CMG spiked from $288.10 to $419.26 during the same period, while LULU appreciated from a split-adjusted $49.87 to $73.70 over the span.