Many investors want to invest in stocks, especially as the S&P 500 hit a new all-time high last week for the first time in more than five years. But prices on many popular stocks are extremely high, making some worry about whether the market has gotten too expensive.
With that in mind, I found five S&P 500 companies that are trading at very high multiples to their expected future earnings, according to the latest forward price-to-earnings figures based on earnings over the next 12 months as projected by S&P Capital IQ. Rather than immediately dismissing these stocks as being more costly than they’re worth, let’s take a closer look to see if there’s a good reason these companies can support such high multiples.
Amazon.com, Inc. (NASDAQ:AMZN), 158.2 forward P/E
Amazon.com, Inc. (NASDAQ:AMZN) is a huge company, with a market cap of more than $120 billion and revenue of more than $61 billion over the past year. But in many ways, it still acts like a start-up, taking aggressive measures to carve out new focus areas and worrying much more about attracting customers than earning profits. Recent price cuts on the already cheap Kindle Fire HD and its cloud-computing deal with the CIA are a couple examples of what Amazon is willing to do to boost sales in an attempt to get more customers into its ecosystem to generate profits down the road.
To justify paying premium prices for Amazon.com, Inc. (NASDAQ:AMZN) shares, you have to be comfortable that at some point in the future, CEO Jeff Bezos will shift from a market-share-driven strategy to a profit-maximizing strategy. Analysts expect much higher earnings in the next couple of years, but not enough to represent Amazon’s full potential. Maximizing profits could be years off, but so far, shareholders haven’t lost faith that it will come eventually.
Netflix, Inc. (NASDAQ:NFLX), 139.0 forward P/E
When Netflix, Inc. (NASDAQ:NFLX) plunged 80% in late 2011, value investors said the move had been inevitable because of its previous high valuation. Yet lately, Netflix has reversed its miscues, and the result has been growing subscriber counts and a share price that has tripled just since September.
Netflix, Inc. (NASDAQ:NFLX) faces competition from Amazon and others in its core streaming video space, and content acquisition deals such as the one it recently completed with The Walt Disney Company (NYSE:DIS) are a big gamble on the loyalty of Netflix’s customer base. Analysts expect earnings to double in 2014, but any slowdown in growth rates could lead to the same pain for shareholders that they suffered in 2011.