We all know that target prices for stocks are usually worthless. I was looking at a stock today and thought of a way to get a target price. It’s probably not accurate at all but I’m not sure why.
Company A and Company B are similar size and in the same business. Both are startups.
Business has a few players in it so it is not saturated but likewise not limited to one or two companies.
There are many company failures in the market.
OK, I’ll spill. It’s EVs
Company A has brought their product to market a year ago. Company B has not yet. Because the companies are so similar would it make sense to say that should Company start delivering their product that the stock price should rise so that Company A and Company B have similar market caps?
You might be able to use that as a starting point, but it’s way oversimplified. For starters, it doesn’t consider important factors like the debt and profit margins of the two companies.
I’d agree there are too many variables to make any predictions with confidence. For instance, Company A might have the better product and so gain a huge market advantage by being first. Or, Company B might have used the time to solve the unpopular flaw in Company A’s product. That’s aside from all the other financial aspects like debt structuring, etc.
I started off by using a stock screener app (‘Simply Wall Street’) to refine my searching biotech stocks based on financial health and growth prospects (PEG <= 1.0), but have since occasionally found that those ‘best’ stocks were poorly rated by other analysts (e.g. Zacks, Motley Fool) for some non-obvious reason.
While any one analyst ranking on its own is (as you say), near worthless, if I find that Company A is consistently rated better value than Company B by several different analysts, then I’m probably going to pick Company A. But I’ll cheerfully admit that a) my heart still rules my head more than I’d like, b) I’m investing only ‘play money’ that I can afford to lose, and c) ‘analysis paralysis’ is a constant threat - I’ve dithered more than once about buying stocks that have subsequently gone on to do very well.
It sounds like you are doing adequate research and due diligence on a specific sector/stock type, so hopefully patterns of what makes an attractive EV stock will become more apparent with time and experience. Good luck!
Correction (?) inserted.
The stock price for any company should be:
(TotalAmountOfMoneyYouCouldGetOutOfTheCompanyInProfitAndLiquidationAfterXYears - debts) / TotalCountOfShares
A simple case would be something like an apartment building with 100 units that’s fully paid off. If you want to buy 50% of the building, and you plan to hold onto it for 5 years, then you can figure that the rent for each room is $1000 a month and that this value will increase by 4%. Likewise you might figure that the value of the land and physical building is worth $3m, and that this value will also increase by about 4% a year.
At the end of the 5 year period, the building will have earned about $541,632 in rent and you could liquidate it for about $3.5m if you needed to, at that point. The total value of the building for the 5 year period is about $4 and so buying 50% of the shares should cost about $2m. If you can buy it for less than that, then you’ve made a good purchase. If you buy for more than that, then you need to hope that there’s a bigger sucker around, out there, with money to spare.
The only real questions in there are:
- How long a period should you choose to value the business over? Answer: However far into the future an average, reasonable person should feel is reasonably predictable for that specific business, in that specific market.
- At what rate will the business grow? We’ve assumed 4% but that will vary by industry, leadership, luck, and other factors. Again, you need to figure out what an average, reasonable person feels like would be a decent bet.
Likewise, a company is just a bundle of assets that could be liquidated and which will have a certain, expected amount of profit per year - both of which are likely to grow over time, at some rate.
But so, a company that started later is generally going to be smaller. When they release their product, they’ll have a few customers where the earlier starting company has built up dozens or hundreds of customers. They’ll have fewer employees, fewer workstations, less equipment, etc.
You might use the earlier companies performance as a proxy for the general curve of growth that you should expect to see with the later company. That’s reasonable. But growing a business takes time and compounding past successes. If I release a new cola brand, I won’t immediately have my 1/30th of the global market on the next day. I’ll only have a few customers, at the most. It’s a long slog to get big. Someone who started that process five years earlier than me is going to have a five year lead in capturing market.
And, let’s note that if your product is pretty similar to what’s out there already, you’re probably not going to be able to steal away customers from the earlier business. The both of you can expand into the customer base who doesn’t have anything like the product at all. But they had that earlier time where they could swing a stick and hit a customer without the product. As a late arriver, you might have to do more work finding customers who are still on the market. Your growth rate is liable to be slower than your predecessor.
So basically, no, you shouldn’t expect them to jump to the same level. Nor should you really expect them to grow at the same rate as the predecessor.
And that’s what I’m doing, trying to work out a good exit point.
If you have a company that’s public but has no product on the market, I’d be thinking less about growth and more about half lives.
There’s no reason (IMHO) for a company in that position to be public, except for the CEO to cash in and run to the Caribbean. So what’s the half life on the jig coming up? And what are the odds that you can find someone willing to buy your shares at a meaningful markup in that amount of time?
It is extremely difficult to ship a product, much less a car. There is a huge risk factor that Company B never ships and has a liquidation value of a warm bucket of spit.
And if Company B doesn’t ship, the value of it’s brand is also zero. Company A has some kind of brand.
Net net, your analysis is missing the risk factor and brand value.
Note in the hypothetical I presented that Company B does start to deliver its product like Company A did.
Fundamentally it presumes that both companies are similar enough that they are on the same trajectory in a perfectly competitive (or nearly so) market. it may be a useful starting point for your growth analysis, but you will still need to look at other factors.
The most important part of each of the stock analyses I’ve done is “Can I afford to lose 100% of my investment if Company Z goes belly up?”
It does take a lot of the adrenaline spike out of the equation… the one where you’re panting “Omigod, omigod, it was up and down and now it’s way down, c’mon, Company Z, baby needs new shoes, and daughter needs to go to college…”
But once I hit 30, I realized that a lack of panic attacks is a good thing.