Driving to work this morning the newscaster on my local NPR affiliate said this:
“And today is a historical day for Google because the stock’s price crossed $1,000. Meanwhile Apple is just at $508, Facebook is at $54 and Microsoft is at $35. Though Google is still very far away from Berkshire Hathaway’s $117k stock price.”
This bugged me. A lot.
A stock’s price is the value of an asset based on future earnings expectation. In that sense Google should be happy that the street believes that it has a bright future.
But that number, $1,000, is not good enough context to judge if Google is doing better than Facebook or Microsoft or anyone else.
Setting aside the fact that companies can be in dramatically different businesses… is there a better way to compare performance than compare stock prices? Yes. Three quick ones.
Market Capitalization.
A simple way to graduate up from a silly stock price comparison is to look at the market cap for the company. It is equal to share price times number of shares outstanding. It is a great proxy for public opinion of a company’s net worth.
Apple is the big kahuna! This number also provides great food for thought when you look at the numbers for Yahoo!, HP, Facebook, etc.
Now when you go off comparing the future glory of these companies, you have valuable context.
Annual Revenue.
The amount of money a company makes from its products and services.
Now you begin to see nuances. Google is much smaller than Apple. Bad? Not really. One is primarily a software/services company, the other is primarily a hardware company. The latter will normally make more money because of the higher prices charged.
You start to see other patterns. See Oracle and HP. How about Google and Facebook and IBM? (And given history the Yahoo! number does make me sad.)
Revenue gives you important context as you think about market cap and stock price.
Net Income.
Accounting rules and other craziness makes this one a little complicated, but I like looking at net income. In its most clean form it is the income minus cost of goods sold, expenses and taxes.
Essentially the bottom-line.
You can see that Apple and Microsoft are monsters! Their businesses throw off cash, a very valuable commodity. : )
You can also see the trouble HP is in, and the impact of the strategic choice Mr. Bezos had made to keep losing money in exchange for more market share.
Looking at that column also gives you a sense for the size of differences between various companies, and should you even be comparing one against the other.
Three columns that give you a much more nuanced view of how a company is really performing, all better than comparing straight stock prices.
Can you only use one?
I know we crave simplicity and want a God metric all the time. But if you want to make smart decisions that quest is usually futile.
Market cap is a reflection of a consensus opinion about the future of a company. Revenue shows how well the present is doing in terms of sales. Under normal circumstances (so excluding weirdness like Amazon, Facebook strategies) net Income is an indicator of how well the company will be able to invest in the future of its business.
I’m glad Google is at $1,000 today. But that number all by itself is not an indication to celebrate. We look at the other key measures as well, then we can kick off the celebration.
Though we still have to figure out how to fix the NPR news team. : )
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Data source: http://goo.gl/ZWpM5b
