Question

Stock prices:

Facebook - 199.21 USD

Netflix - 379.93 USD

Walmart - 112.88 USD

Apple - 201.24 USD

Based on your knowledge of stock valuation, do you think the current share price is a fair reflection of the company's performance or do you think it is over valued/under valued? Explain.

Answer 1

In order to assess the valuation of a stock, a comprehensive financial analysis regarding the earnings of the company and its impact on price shall be done. However, there are certain key ratios, which depicts whether a company is overly priced or not in the market, based on those ratios a evaluation of the above stock prices can be done.

Facebook

The company is priced at almost $200 which is at a P/E ratio of 29.60, this means the company is having an EPS of around $6.75. If we look at the industry PE of technology sector, the same stands around 30, hence the stock can't be termed as overvalued or undervalued on that front and it is perfectly priced based on industry standards. The price to book ratio of the company is 6.92 which is equal to the industry standards of 6.92 hence the same is appropriately priced.

Netflix

This stock can be considered as a overpriced share, this is because of its stock prices as compared to its earnings. The company is having a P/E ratio of 135 which way expensive based on the industry standards. The company's operating business performance has remain subdued in the recent years. With a 135 PE and a price of $380, the company's EPS stood at only $2.81. A company which earns only $2.81 per share is priced at $380 per share is a very expensive preposition. Though the profit margin of the company has increased to its highest in the past five years, still the price completely reflects the same and any further upside is substantially restricted in the stock.

Walmart

The company is having an EPS of around $2.9 with the current stock price of $112, the PE ratio of Walmart stands at 39. This is among the highest levels of PE ratio that is given by the market to company. Walmart off course is a very big name in the consumer retailing industry, but the average PE that is being offered to other companies in the same industry is not more than 16 or 17. Therefore, the current pricing of Walmart is already very high as compared to industry standards and peers. This is despite the fact that company is facing its lowest net profit margins in the recent years and thus such rich valuations to the company is not justifiable from an investment point of view. The ROE of company has reduced to 10% as compared to a high of even 17% in 2017 and 2016. This indicates that the stock price is currently overvalued.

Apple

The company's stock price of $202 is priced at a P/E ratio of around 17. The P/E level of the company is less than the average industry standards of around 21.7. This shows the company is undervalued in terms of its prices. The ROE of company is exceptionally high at 51%. The valuation of company is quite comfortable and investing in the same can be a value investing for a long term investor.