SEEK Limited (ASX: SEK) has performed exceptionally well recently, as has its share price. In terms of market share, Seek is number one, or two, in nine Asian countries for on-line job placements, as well as being number one in Australia. The nine Asian countries have most of their market penetration ahead of them. In other words, Seek should continue to grow, even if it just rested on its laurels. However, Seek has a virtually unblemished record of innovation, leading to strong sales and profit growth over many years. Seek's on-line educational services are an example of its ability to innovate.
Seek is in a rather special place in the stockmarket. This is a space occupied by few others, including REA Group Limited (ASX: REA) and Carsales.com Limited (ASX: CRZ). What these companies have in common is that they dominate in their respective markets in Australia; they all have first mover advantage; and are increasingly winning more business for relatively small capital outlay. Traditionally, such high fliers command a substantial premium for their price to earnings (P/E) ratios.
Some US stocks, such as Amazon.com, Inc. (NASDAQ: AMZN) command a P/E ratio of several hundred. Amazon is today selling with a P/E of 542 times. That does not mean it would take that many years to earn enough per share to equate to the price, but it attests to market expectation of colossal growth in earnings.
For comparison, BHP Billiton Limited (ASX:BHP) has a current P/E of 14.4, based on forecast earnings of 261.2 cents per share, for the year ending 30 June, 2014. Commonwealth Bank of Australia (ASX:CBA) has a P/E of 14.7 based on forecast earnings of 525.7 cents per share for the year ending 30 June, 2014. These two mature blue-chip stocks are trading at a time when growth for them is nowhere near as pronounced as for a much younger stock, such as Seek.
Where does that put a high growth stock like Seek? My take is that Seek is and always will be expensive, because annual earnings, plus a factor for growth, does necessitate a high P/E ratio. In fact, the better the growth, the better the P/E, hence the better the share price. So, a P/E ratio is reality plus expectation, which can vary with sentiment.
Foolish takeaway
Based on expected earnings of 53.3 cents per share for the year ending 30 June, 2014, Seek, trading at $16.28, has a P/E ratio of 30.5 times. For a financially sound company with minimum risk, in a multi-year growth phase, a P/E of 30.5 seems reasonable to me. I would buy it if the price retreated to the closest technical support level, which is $13.50. That would represent a current P/E of 25 times, assuming this financial year the earnings meet expectations of 53.3 cents per share.
