I'm in the process of evaluating a stock, and one of the things nagging me is stock valuation and its market cap.
I understand, or believe I do, the following:
- Market cap is the share price x outstanding shares
- Market cap represents the perceived value of the company to the market
- Market cap is typically higher than book value as it includes discount future growth
- Share price is determined by supply and demand
Given a company ABC Corp that produces a commodity, lets assume the following in 2010:
- Share price: $10 (stock's ATH)
- Outstanding shares: 100M
- Market cap: $1B
- Commodity price: $50/ea
- ABC Corp has a single commodity resource producing 50M pieces/year
Between 2010 and today, commodity prices have dropped to $5 and it was not viable to produce the commodity. To stay alive, ABC Corp suffered from share dilution, but now commodity prices are spiking. Assuming today:
- Share price: $1 (stock's ATH)
- Outstanding shares: 800M
- Market cap: $800M
- Commodity price: $50/ea
I'm interested in purchasing the stock, but I also want to assess how much room the stock has to grow. Others I chat with about the company believe the stock can rise to anywhere between $6-10, but I don't understand why they think that. If the stock rose to $6, the company would have a $4.8B market cap; likewise $10 would give it an $8B market cap. I would've thought the stock only has ~$0.25/share in growth to return to the $1B market cap.
If the resource is the exact same, and the commodity market is the same, why would the market assign a valuation to the company 4-8x over its previous ATH valuation? Would some of these factors lead to such a valuation?:
- Might have the largest active producing resource compared to others
- Might have the quickest timeline to return to production, capitalizing on commodity demand
- Might have the potential to acquire more resources
TL;DR
Struggling to understand why others believe the share price of a stock can grow to levels that would put its valuation well above historic valuation on a fixed commodity after significant share dilution. If market cap represents what the market perceives the company to be worth, what would lead an investor to believe it is now worth multiples of its previous valuation? Or is market cap really just an arbitrary metric used for generating ratios to compare similar companies by size/market valuation?
Submitted July 01, 2021 at 10:42AM by _Gorgix_ https://ift.tt/3678jCI
