Video Discription |
So, what is valuation? Find out in the video above!
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--Video Editing by Justin Nelson--
When I talk about valuation, I know a lot of folks THINK they know what it means.
I talk to a lot of new investors or even financial experts and they tend to value companies at their public market cap. The company and its success are defined by its stock price. If a stock is up the company is doing well, and if the stock is down the company is performing poorly.
As a value investor, I’ve learned to separate the company and the stock price. This typically doesn't go over well when I talk to normal folks out there.
We chat about a stock, they only mention the stocks performance and when I tell them what I think the company is truly valued at, they look at me like “what the hell are you talking about”. A good example of this is Tesla.
A company has a certain number of shares which are basically like pieces of a pie. These numbers can get into the 10s of millions. If you buy a share and become a shareholder, you are literally a co-owner of the company, its revenue, its assets, and its cash in the bank.
If a company gets liquidated or bought out, you literally get a deposit of what your share value is worth. A company’s market cap, or worth, is simply their total number of shares in the world multiplied by the share price. For example, at the time of this recording, Tesla’s shares outstanding are 1.036 billion shares, each valued at $745 dollars per share.
Multiply these two numbers together and you get Tesla’s market cap of $768 billion. This is what the world thinks Tesla is worth.
Consequently, Tesla has only delivered 310 thousand cars in 2022. In the same timeframe, Ford has sold 760 thousand vehicles. Double that of Teslas. But Ford’s market cap is only 48 billion.
So what gives?
Why is Ford’s market cap 1/16 of Tesla? This is the definition of an ovevalued company. They literally make less similar products, yet their company is “valued” over 15 times more. What’s baked into Tesla’s price is the excitement and emotion people have over a company that “could be” the next best thing.
So this is your task: find great companies at UNDERvalued pricing, and not overvalued pricing. You don’t want to overpay.
The valuation is subject to how the company is performing. How their sector is performing. How needed is their product. It’s subject to whether the CEO gets caught in fraud. It’s subject to the excitement around the company or lack thereof. People are excited about Elon Musk, the future of electric cars, and Tesla. No one is excited about Hewlitt Packard. It’s a boring company, it's not in the news, and no one cares about them. All of the concepts make up the company's public valuation. But it doesn’t mean that the company is properly valued.
You might see this in your personal life. Say you want to buy a pair of shoes. On Nike.com they cost $120 and at Dicks Sporting Goods they cost $110 and you have a 15% off coupon. The Savvy internet shopper that you are, you feel proud that you got a $120 pair of shoes for under $100. The shoes had a valuation of $120 but you didn’t pay that. You got a great deal. And at no point would you ever pay $140 for those same pair of shoes. Stocks are exactly the same except the buy points are opposite. The excitement around the company causes more people to buy-in. And causes elevated share price and valuation. wHmJSxFq_J4 |