I've said this before but anytime a stock is trading at an earnings multiple significantly higher or lower than average, the burdon of proof should fall on the person arguing for such a multiple.
Netflix is trading at a P/E of about 75. Right or wrong that should at least give an investor pause. There is a lot of success already baked into that price. At this type of multiple a company has to outperform already sky high expectations in order for an investor to make money(in a fully rational world). This is possible but it becomes increasingly difficult as that multiple expands.
For companies like Linked In with tiny earnings a sky high multiple might make sense. They only have one or two quarters of profitable business in. But for companies like Netflix and Amazon, who have sustained growth, revenue, earnings, and a pretty clear business model, you really have to think about the magnitude that 70x earnings growth implies.
I guess it depends on how you define sky high. LinkedIn is trading at 2100x earnings according to google finance. Now there are certainly times when P/E is meaningless and LinkedIn probably is one of them but for a company with no track record it should give some pause.
The question is are people investing in these companies or are they speculating about them?
To be honest I'm not an expert. In my opinion Netflix feels overvalued to me. Maybe not based on the P/E but it certainly doesn't seem like a 15 billion dollar company to me.
