Yeah, that’s a clickbait title I guess, but I want to get this through people’s heads. You can’t look at a stock’s price and know anything about the company or how cheap or expensive the stock is. Price is meaningless without additional information.
I cringe anytime I hear or read a comment like the following, and I hear it all the time:
“I know Tesla’s stock price has gone down, but it’s still above $200! You can tell they’re kicking Ford’s butt because Ford’s stock is so cheap at just $10.”
I believe there are no dumb questions, so if you don’t see what’s wrong with the sentences above, don’t feel bad. Trust me, you’re not alone.
The whole stock market works off of the idea that companies have value. If you buy a share of that company’s stock, you get a small fraction of ownership in that company and, therefore, are entitled to a small piece of that value. However, whether or not you are getting a good deal for that share of stock depends on what percentage ownership you are getting for that share.
There are two variables that go into determining how much value a share of stock has. The first is how much value the company as a whole has. This is the tough part. This is the part where analysts and experts argue and use thousands of different metrics, equations and tools to estimate and project. At the end of the day, there’s no sure-fire way to determine the value of a company. There’s only different people’s opinions. That debate is what makes the market move on a daily basis.
The other variable that is critical is how many shares of stock the company has. This is absolutely measurable and absolutely critical.
Tesla has about 178 million shares of stock outstanding priced at around $219 per share. Quick math shows 178,000,000 x $219 = $38.9 billion. That’s Tesla’s market cap. That’s “theoretically” what Tesla is worth.
Ford has 3.92 billion shares of stock outstanding priced at around $10 per share. Quick math shows 3,920,000,000 x $10 = $39.2 billion. That’s Ford’s market cap. Tesla is valued at $38.9 billion, and Ford is valued at $39.2 billion.
In other words, Tesla is worth less than Ford, regardless of their respective stock prices.
I personally think Tesla’s valuation is high given the amount of sales and profits the company makes. But that’s an argument for a different day. The point of this story is that Ford’s $10 share price is absolutely meaningless compared to Tesla’s $219 share price.
Yes, Amazon has a $1,900 share price, but Walmart’s $110 share price doesn’t even compare. In fact, if Walmart hadn’t split its stock nine times in its long history, its share price would be $56,320. Again, that’s a completely arbitrary number.
You can look at a company’s share price and compare it to the same company’s share price at different times in the past. You can look at Ford’s price-to-earnings ratio and compare it to Tesla’s price-to-earnings ratio. You can look at Bank of America’s book value per share or earnings per share and compare it to the same numbers from Citigroup. But you can’t just compare two companies’ share prices in a vacuum.
You can’t take two identical 16″ inch pizzas, cut one into six slices and one into 16 slices and then say the pizza cut into 16 slices is a smaller pizza because each individual slice is smaller.
Ford and Tesla are almost exactly the same size “pizza” worth about $39 billion each. Ford’s share price is simply $10 because it is cut into much smaller slices.
The next time you hear somebody compare two companies based simply on their stock prices, please at least tell them they need to read up about the differences between share price, share count and market capitalization.
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