WTF?: What's the Future and Why It's Up to Us

by Tim O'Reilly

The price-earnings ratio of a stock is the difference between the actual net present value of a company’s future profits and its market price. Amazon’s P/E ratio is 188 at the time I’m writing. Facebook’s is 64, Google’s 29.5. The ratio for the entire S&P 500 is about 26. That is, for every dollar of profit it makes today, Amazon gets $188 in stock value, Facebook gets $64, and Google gets $29.50. For a company like Uber, which has no profits yet but is valued at $68 billion by investors, the ratio is essentially infinite. That leverage makes stock an incredibly powerful currency, which swamps the purchasing power of the ordinary currency used in the market of real goods and services. Amazon’s profits in 2016 were just shy of $2.4 billion, and its book value (the actual value of its cash, inventories, and other assets less its liabilities) $17.8 billion, yet its market capitalization at the end of the year was $356 billion. George Goodman, a financial writer who published under the pseudonym Adam Smith, calls this “supermoney.”