Even The Greatest Companies can be Overpriced

Even The Greatest Companies can be Overpriced

Amazon, Netflix and Google. Three great companies whose products I use with regularity. They are profitable. They are growing. They have a dominant market position. They have great management. They are innovative. For all those reasons, they should trade at a high price. The question is how high. And no matter how good a company is there comes a point where it is too high.

In my view, all three have reached that point.  This is not to say I would recommend being short. Who knows how long the enthusiasm will last?

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But at current prices, I would not touch any of them on the long side and would take profits on outstanding positions. For Amazon and Netflix in particular, the P/E ratios are astonishing - 192 and 241, respectively!

Those sort of multiples imply market expectations of extraordinarily rapid growth in future cash flows. It is hard for me to see those multiples expanding further and easy for me to see them contract considerably. At this level, the risk/return tradeoff is far too weighted on the side of risk.

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Bradford Cornell is an emeritus Professor of Financial Economics at the Anderson School of Management at UCLA. Prof. Cornell has taught courses on Applied Corporate Finance, Investment Banking, and Corporate Valuation. He is currently developing a new course on Climate Change, Energy and Finance. Professor Cornell has published more than 125 articles and four books on a wide variety of topics in applied finance. Professor Cornell is also a managing director at BRG where he heads the practice on Climate Change, Energy and Finance. In addition, he is a senior advisor to the Cornell Capital Group and to Rayliant Global Advisors. In both capacities, he provides advice on fundamental investment valuation.

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