One Level Lower – Revenue and Market Cap

It’s so cheap it can’t go down much further. Not, not, one of the best reasons to buy a stock. Regardless of the price, unless it is trading at absolute zero, any stock can drop the same amount, 100%. Finding the true value of anything usually means looking beyond the labels and facades most people casually witness. In stocks, two things I see beyond the price are the Revenues and the Market Cap. Together they’re better judges of whether a stock is cheap. Together they are a source of optimism for my portfolio.

If you haven’t already, wander through the stock synopses I posted as part of my semi-annual exercise. Notice in each that I start with data before words (after the disclaimer, of course.)
AMSC (Market Cap was $0.160B is $0.106B)
GERN (Market Cap was $0.196B is $0.611B)
GIG (Market Cap was $0.028B is $0.033B)
MVIS (Market Cap was $0.064B is $0.042B)
RSOL (Market Cap was $0.068B is $0.110B)
Yes, I follow the stock prices for daily swings, even though I prefer to trade on the span of years. But, when I want to check my individual investments I check the Market Caps. Market Cap is short for Market Capitalization, which is nothing fancier than the price of the stock times the number of shares. Simple enough, but the added influence of the number of shares brings a lot more information to a single number.

Stock prices rise and fall dramatically enough that entire media outlets can spend every minute of the day reporting on the moves of the thousands of publicly traded companies. It is entertaining, and mostly moot because most of the motion is noise. If there’s no news, there’s no real reason to change the price; except that the markets are designed to make sure the prices move so the money continues to flow. Handy, but a bit silly too.

If the number of shares of the company never changed, then the price would be a good long term measure of the company’s progress. But for almost every company, the number of shares changes every year. When managers and employees receive enough shares as compensation, more shares must be issued. Financing sometimes involves additional shares being created and sold. Stock splits are the most obvious change because they usually involve a doubling or a halving of the share count. The price halves or doubles appropriately, but only the stock changes. The company remains the same company. Ideally, the Market Cap is a constant before and after the split. That’s true of the compensation packages too, but the influence there is usually a few percent, and easy to miss.

I particularly notice Market Cap because I invest in small companies before they are profitable. Besides debt, the main way a lot of them stay in business is to pay the bills by selling shares. Bit by bit they sell more shares and slowly dilute the price of the stock. Track the Market Cap and the dilution can become more apparent even if the price stays the same.

Market Cap alone isn’t very useful other than for long term comparisons, though it can put things in perspective. GigOptix’s Market Cap is a bit more than $30,000,000. There are probably houses that go for that much. I know there are boats in the price range, and some custom airplanes probably spend that on furnishings, or engines, or paint jobs.

The other number I watch for any company that is actually selling something, not just ideas and prototypes, is Revenue. Earnings and profits are wonderful, but they are also subjected to more bookkeeping tricks. Revenue tends to the truer to the business of business. If Revenues are increasing faster than expenses, then profitability is inevitable (as long as extrapolation holds).

Put the two numbers together in a ratio, Market Cap over Revenue and you basically have the Price to Sales ratio. How much does it cost to buy a company that is bringing in a dollar in sales? If you look as profits as a way to pay back your investment, then the lower the Price to Sales ratio, the shorter the time to recover your investment. Of course, as shareholders we’re only buying a small slice of the company, and the sales only come all the way through if there are dividends, but the idea maintains its merit.

In general, companies that are expected to have high profit margins start off with high Price to Sales ratios. I typically use P/S  ~ 6 for high-tech. Steady, boring companies have lower ratios. Construction may be P/S < 1.

So go back and look at those numbers above. GIG and MVIS have similar Market Caps, so they’d seem to be similar companies, and they are. They are both electronic component manufacturers with disruptive technologies. I think a P/S = 6 is actually too low for them because the Present Value of their Future Revenues Discounted for Risk is much higher than their current sales. Yet, the company with the smaller Market Cap, GigOptix, has a P/S = 1.15 while the “bigger” company, MicroVision, has a P/S = 6.23. That’s because GigOptix is making about six times as much money as MicroVision. The irony being that part of GigOptix’s success is because they bought some of MicroVision’s cast-off technology. Solely based on that comparison, GIG is a better investment than MVIS. (It also suggests that, at the time, GIG’s managers understood MVIS’s technology better than MVIS did.) The real story is always more complex, but simply looking at their stock prices wouldn’t reveal the potential that either GIG is priced too low or MVIS is priced too high. (The more complex story is that GigOptix may get higher profit margins but that MicroVision may tap an much larger market.)

And here’s where the storied stock that is MVIS  settles out. The stock reacts to rumor and speculation, disappointment and delay. Within the last five years MVIS has ranged from a high of over $40 to a low below $2. Yet, because of market dilution and stock splits, the story is harder to track unless you look at market cap, which still shows variation, but much less than what the price sees.
MVIS market cap in $billions
12/27/13    .041
6/30/13    .064
12/31/12    .048
6/30/12    .027
12/31/11     .042
6/30/11     .128
12/31/10     .177
6/30/10     .263
12/31/09     .244
6/30/09     .190
12/31/08     .11
07/01/08     .16
12/31/07     .094
06/30/07     .20
12/31/06     .126
06/30/06     .049

MVIS is trading below $2. It can be hard to believe it will go much lower, but I keep in mind that using the pre-split numbers today’s price would be one-eighth of what the ticker shows. More like $0.20 than $2.00. And that the Market Cap is essentially the same as it was in June of 2006. But the number I really keep in mind is what MicroVision’s Market Cap can be considering the Revenue they may generate. If a company can generate $1,000,000,000 in revenue, then daily fluctuations on the scale of $30,000,000 would barely make the news. They wouldn’t make enough noise.

The price is the easiest thing to read about is the easiest thing to talk about, but looking one layer lower may produce a much more valuable story. And that is true of much more than just stocks.

About Tom Trimbath

consultant / entrepreneur / writer / photographer / speaker / aerospace engineer / semi-semi-retired More info at: https://trimbathcreative.wordpress.com/about/ and at my amazon author page: http://www.amazon.com/-/e/B0035XVXAA
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