The Lunar New Year is just around the corner. If you don’t celebrate it, lucky you.
It’s that time of year where family gatherings turn into subtle (and not so subtle) competitions: who’s got the bigger house, the fancier job, or… who’s packed on the most pounds?
I remember once, my aunt spotted a weighing scale in my house and casually asked my weight.
“102 kg,” I replied.
My relatives were mortified. “Triple digits?!” they gasped. “You need to lose some weight!”
They didn’t consider that I’m 195 cm tall and at a healthy 15% body fat. To them, triple digits on the scale simply meant I was overweight.
Funny thing is, these are the same folks who tell me Meta’s shares are too pricey just because they’re $401 per share, while Apple’s more affordable at $191.
Claiming a stock is expensive based solely on its share price is like calling someone fat based on their weight alone. It’s superficial (and silly).
The share price alone doesn’t tell you anything. It must be measured against how much cash the company is bringing in.
Let’s break it down:
For instance, Meta generated $14.30 in free cash flow (FCF) per share in the last twelve months (LTM), while Apple managed $6.30.
When you look at Meta’s price-to-FCF ratio, it’s trading at 28x. In other words, for every $1 of FCF Meta generates, investors are paying $28.
Apple, on the other hand, is trading at 30x on its FCF. This means for every $1 of FCF Apple brings in, investors are shelling out $30.
Suddenly, Meta doesn’t look so expensive compared to Apple, does it?
There’s more layers to peel but I hope this quick comparison helps illustrate why judging stocks by their share price alone doesn’t make sense.
And I wouldn’t want you venturing into stock market investments without understanding the basics of stock valuation.
I hope this short illustration shows you how silly it is just to look at the share price.
So, here’s something special for you:
I’ve put together a free video valuation course. It’s designed to help you learn how to value businesses effectively, so you don’t end up overpaying for stocks. And it’s free for the next 72 hours!
Enroll in the free valuation course and feel free to share with your friends:
https://steadycompounding.com/valuation
Happy investing, and here’s to making smarter decisions – in stocks and at family gatherings!
Cheers,
Thomas