There absolutely is. For a company to be valuable, it must return more profit to shareholders than they put in. The P/E ratio indicates how long it will take for this to happen.
Not really, it indicates how long if nothing changes over the long term. Which never happens. Netflix is growing very rapidly which makes P/E all but meaningless for "how long" questions.
The metric that Netflix uses is subscriber count, and all indications is that the subscriber count is not growing at a pace that explains the PE ratio. In fact the growth is declining as evidenced by their guidance for the quarter.
That's under the assumption that all you can do with a stock is hold onto it and pocket all the profits.
If I buy a house, put in a pool, then sell the house for $100k more than I bought it a year later, it doesn't matter too much what the initial price was, except in comparison to other investments
You can always sell the Netflix stock after pocketing some dividends or something. The purchase price is not money lost, because now you have the stock.
I get P/E being important for someone trying to buy a company.
In raw "what is possible" terms I cannot fault you. But I really like the idea of fundamentals, and "what is likely" is a different kettle of fish.
In a sense, share prices compete with the cost of starting a new company that does the same thing. P/E ratios of 230:1 mean an increasing risk that instead of someone buying your shares, they go and start a competitor. Then everyone buys that competitor instead.
In any market there is an upper limit to the P/E ratio, and nobody wants to be the buyer who finds it. Especially if the company's income doesn't rise; because then you have to sell at a loss to recover any money.
In practice, there is also the risk of catching a collapse in the market. They happen that, once every decade or so? Great time to be able to rely on an income stream when that happens.
You are right, but I am talking about investing for long term.
For short term, most of the time, just the price chart is analysed.
Just to write here, long term and short term (speculation) is totally different. I was talking just about very long term.
