Making sense of a high PE

Livewire Exclusive

Livewire Markets

Software companies often attract a very high valuation, at least at face value. Drilling down deeper into the economics of these business reveals the real value of owning a business with a sustainable ‘moat’ that can reinvest at high rates of return, says Kate Howitt, Portfolio Manager at Fidelity International


Key points:

  • Companies with a sustainable ‘moat’ that can reinvest in their business shouldn’t exist according to traditional economic thought
  • When a company can grow their competitive advantage are compounding their value, which is known as a network effect
  • The price-to-earnings ratio on these businesses look high, but these prices are justified by their ability to generate high returns on an expanding asset base
  • Investors are beginning to understand the economics of these businesses, which has resulted in PE-expansion for some stocks
  • As the market has come to realise this value, some of these stocks have become fully prices; this demonstrates the importance of an active approach. 

For further insights from Kate Howitt and the Australian equities team at Fidelity, please click here

1 contributor mentioned

Livewire Exclusive brings you exclusive content from a wide range of leading fund managers and investment professionals.

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.


Please sign in to comment on this wire.