Summary: Valuing stocks beyond P/E ratios and discussing factors influencing company valuation.
From Nasdaq: 2024-11-24 14:28:00
Patrick Badolato, a professor at the University of Texas at Austin, shares insights on valuing companies, including how to go beyond P/E ratios. Walmart could double its earnings with the right levers, while growth stories for Netflix extend beyond subscriber count. Sign up for daily market news at breakfast.fool.com for more insights.
Consider investing in Walmart after hearing from The Motley Fool Stock Advisor team. Explore the 10 best stocks for investors to buy now, which could yield significant returns. Stock Advisor has outperformed the S&P 500 since 2002 with regular updates and new stock picks each month.
Badolato discusses the importance of valuing companies for all investors, emphasizing the relationship between inputs and outputs in valuation. He simplifies the concept using analogies like nutrition and exercise to explain how valuation works with recurring company performance. Valuation may seem complex, but it’s essential for making informed investment decisions. Investors can use historic market averages to make valuing companies easier. The PE multiple, price to earnings, is a good starting point. Companies like Disney trade above 20 times earnings, while others like General Motors trade below. Price to earnings ratios are just a starting point and not the end of valuation.
Price to earnings multiples are a beginning reference point for valuation. It’s important to not solely rely on them for determining if a company is undervalued or overvalued. Looking at revenue projections and past price to earnings multiples can provide additional insight into a company’s valuation.
Ultimately, valuation should be based on our own projections of a company’s future earnings. While there may be flaws in reported earnings, the focus should be on where earnings are headed and how the stock price will move alongside them. Investors should look beyond just what the company is doing currently and focus on future performance for accurate valuation. The key to understanding a company’s PE ratio is ensuring core earnings are representative. One-time gains or losses can skew the ratio. Adjust for non-recurring items for a more accurate valuation. Focus on value drivers like revenue and expenses to determine a company’s worth. Risks can impact performance and should be woven into revenue and expense discussions.
Consider worst-case scenarios when projecting revenues and expenses. Evaluate potential threats and competition that could affect financial projections. Building multiple scenarios helps prepare for unforeseen risks like geopolitical tensions. Geopolitical factors can impact companies like EV makers and microchip suppliers, adding complexity to financial modeling. Investing in the S&P 500 involves expectations of economic and company growth, along with earnings growth and inflation. Minute Earth podcast explores intriguing science questions in short, entertaining episodes. Walmart’s high PE ratio suggests investors expect significant earnings growth, challenging for a company known for low prices. Increasing revenue and margins is crucial for Walmart’s future success. Walmart is focusing on margin expansion by avoiding price increases and seeking cost efficiencies through automation in their supply chain. They are also looking to grow their advertising business to improve margins and considering new lines of business for long-term growth.
As the retail landscape evolves, Walmart and Amazon are positioned to dominate with their scale and efficiency. Walmart’s potential growth lies in diversification and maintaining a competitive edge in the market. However, expanding into new businesses like healthcare could pose risks to shareholder value.
Nvidia’s high valuation, currently at 65 times earnings, raises questions about their future growth prospects. The company’s success in chip design and fast systems is driving their earnings growth potential, but the uncertainty surrounding their future performance makes predicting their valuation challenging. Nvidia boasts incredibly high operating margins, particularly in their compute network segment, with margins around 71-72%. While this is extremely attractive, it also invites potential competition. To maintain their valuation and leadership, Nvidia must focus on maintaining high revenue growth without sacrificing margins. The future of the industry remains uncertain, making long-term predictions challenging.
When evaluating Netflix’s value drivers, revenue growth and market multiples play a crucial role. A cumulative revenue growth of 100% over 6 years, paired with a higher than average market multiple, could indicate undervaluation. However, increased competition, lower multiples, or slower revenue growth could lead to overvaluation. The role of footnotes and margin expansion are also important considerations for Netflix’s future success. Netflix has seen a drop in subscriber growth in 2022 due to changes in account sharing policies. However, they are expected to retain subscribers and potentially increase pricing power by introducing live events like NFL games and WWE on the platform. The company may explore additional revenue streams such as advertising to drive earnings growth.
Analysts predict that despite challenges in subscriber growth, Netflix’s focus on introducing live events and potential pricing power increases could drive revenue growth. The company’s ability to retain subscribers and explore new revenue streams like advertising may contribute to long-term earnings growth. Investors are encouraged to engage in conversations about valuation and investment decisions. 1. Mary Long and Ricky Mulvey have different positions in various stocks including Kroger, Lululemon Athletica, Netflix, Taiwan Semiconductor Manufacturing, and Walt Disney. The Motley Fool also has positions in and recommends Costco Wholesale, Nvidia, Walmart, and Walt Disney, while recommending General Motors and Kroger as well.
2. The Motley Fool also suggests long January 2025 $25 calls on General Motors. It is important to note that the views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc. Make sure to check out the full disclosure policy for more information on the stocks mentioned in the article.
Read more at Nasdaq: Valuing Stocks 101 | Nasdaq