Apple 2.0

Covering the business that Steve Jobs built

Amazon's price-to-earnings ratio is now 2,767. Apple's is 13

November 3, 2012: 5:31 PM ET

The discrepancy in how the market values the two companies is too big to graph

Source: Yahoo Finance

FORTUNE -- The ratio of share price to annual earnings -- usually expressed as P/E or simply PE -- is the simplest and most widely used metric to gauge the relative value of a pair of companies.

Case in point: Apple (AAPL) and Amazon (AMZN), two bellwether U.S. tech companies that reported quarterly earnings last week.

Apple's earnings were up and the stock went down. Amazon reported a quarterly loss and the stock went up.

The result is a pair of PE ratios too far apart to show on a linear graph. Amazon's twelve-month trailing PE is 2,766.93. Apple's is 13.06.

Because PE is a measure of earnings over time, you can think of it as representing the number of years required to pay back a stock's purchase price (ignoring inflation, earnings growth and the time value of money).

Put another way, if it takes Apple 13 years to pay back your initial investment, it will take Amazon nearly three millennia.

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Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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