UNDERSTANDING VALUATIONS IN THE STOCK MARKET

追加: 2026-06-03

[00:00:03]All right, guys. So, today we're going to discuss valuations in the stock market. Um, I get a lot of questions on this obviously because there's always this misconception that paying a lower stock price means you're paying a cheaper price for a given company. I always find kind of hilarious because people don't really look at the market capitalization of a given company instead of the share price. But just to kind of break it down easily and then we'll do some Q&A afterward. You guys have any questions at all? I'm going to try and make it super simple, right? I made this little infographic kind of thing for you guys to understand.

[00:00:38]So a stock price is in essence the earnings per share of a company, what they actually make from their operations uh multiplied by their PE multiple right essentially. So this reflects the fundamentals in the EPS. The multiple reflects the belief of how they'll perform in the future essentially. Um now a multiple premium is the price per dollar of earnings that that you're paying for essentially. Uh if you're paying for example for a very very high multiple stock like a Tesla, you're paying many many dollars per dollar of earnings. And the way you can think of it is kind of like thinking about um if you were to buy a business yourself. And this is what Warren Buffett kind of uses as a mentality in approaching investing in companies. He thinks if I were to buy the business as as a whole, you know, is it worth buying at the current price? So I always go back to the basic example of like an ice cream shop because it's very very simple. It's like an explain like I'm five example where um if a company's making for example like $10,000 a year from selling ice cream and the company wants to sell their business for a h 100red grand you're paying 10x for that multiple right but let's say for example you it's like a high-tech ice cream company you know with AI machines that make interesting flavors for example right all of a sudden that same company making, you know, $10,000 maybe is trying to charge a million dollars for the valuation, right? Now you're paying a hundred times earnings, a much much more expensive uh multiple to pay. And the way you got to think about it about it is like how to get your money back.

[00:02:23]So like earlier on in my investment career, you know, I had many opportunities to invest in startups. Um there was one company I invested in called a Aeros smartwatch and they they had a uh a smartwatch with a camera on it with a rotating bezel and essentially um their valuation was predicated upon like their R&D and their you know having having already created the watch itself uh like in China they had a prototype already made um so they were asking for a million dollar valuation right so to buy you know 1% of the company you had to put basically $10,000 in, right? And there wasn't any any earnings there at all whatsoever. Right. So, that's kind of like like um a pre-earning company.

[00:03:09]But anyways, um that was a a good lesson for me to learn because I paid, you know, uh like a decent multiple for nothing essentially. I got a cool story out of it. You know, I I watched them make commercials in California for the the watch and I got an actual watch and stuff like that. It was a cool experience but it cost me you know some money right. Um anyways back to the point here. So a multiple is price investors will pay for a future stream of earnings and this reflects this multiple reflects belief about you know confidence in the company right uh is a company going to do very well going forward right will it grow going forward right is that growth sustainable do they have a moat where it can be sustained for example right as well as any possible risks. So these are things you got to think about when you're investing in a company obviously. Um and then as it pertains to to the belief um you know the market values future cash flows out as far as like 20 years. So you know in in university if you're if you're in a finance program you do something called uh discounted cash flow analysis DC it's called DCFF uh discounted cash flow of the firm. And basically what you do is you predict the um the future stream of cash flows in in a company and then you discount them using the current interest rate uh and get a present value of the company based upon the future cash flows. But again, it's it's pretty much impossible to know what a company will do way way down the road. As we saw during COVID, you know, like you might think airlines are safe for a while or cruise lines are safe for a while or you know, whatever got affected heavily or company like um one one of the biotech companies that came out with the vaccine, right? There was no predicting that they would have a vaccine for a global pandemic. So, it's impossible to really value companies that far into the future, right? And so in reality, markets will only look one to two years into the future. And that's why earnings reports typically give you guidance for one year into the future, right? Um they might talk about you know, for example, um like like two year or three year out endeavors they're working on like you know Tesla as as an example. Musk always talks about, you know, full self-driving, we're going to be on Mars, we're going to have flying cars, like all these things that that um may transpire and it hypes up investors because they get very excited about it, right? Um so it's important to to kind of bifrocate reality from the potential overall. Kind of like when you think about it like a star athlete, it's it's pretty easy to understand what a company sorry, what an athlete might do next year or the year after that. But all athletes decline at some point in time because we all age out and in the future you can't extrapolate and say hey like LeBron James will be great in in 20 years when he's near retirement right for example. Um so what happens here is this has the effect of stretching multiples too much when people get too excited about valuations. So we're seeing that right now kind of in the semiconductor space perhaps because you know uh everyone thinks that this is going to run forever and we're going to need chips forever which we will only need chips but the thing is the demand side um of the equation might lower over time and but the same function when you look at economics supply and demand supply may actually increase over time such that essentially the the uh price comes down and perhaps not as profitable. for example, like that. That was a key um concern for Micron in their recent report. They said, you know, we bought a second site in Taiwan to build a second uh fabrication facility and it's going to cost about $25 billion. It would take about, I think, three years to build it up. So, by the time that's already built up and already invested in, it's possible the demand has dropped off.

[00:06:58]Now, they have way more capacity than they have demand for. What happens?

[00:07:02]Prices plummet. uh or they can cut it offline but then they're operating heavy overhead costs. Anyways, I want I want to delve into like you know um manage accounting side of things, right? But uh the point is is that narratives pretty much drive price action in the markets, right? You might have a new company that comes out and they're given a crazy crazy multiple, you know, let's say a 30x multiple for example, right? It might have $5 EPS uh at a 30p multiple gives it a share price of 150. You might have an old company like a telecom company or tobacco company for example, right? A more established company that has nominal uh room for growth. They also have the same amount of EPS, right? But they trade at at a 10p multiple. So they're trading at, you know, oneird the stock price. Same EPS, three times the price difference overall. And this is where you got to think about what uh a good investment truly is and what Warren Buffett always talks about. He says you can have a great company or a good company in this case which is a terrible investment or a bad investment. You also have a bad company that's a great investment for example right you might have good company with strong business fundamentals rising earnings you know it's price of perfection. Um, an example of that could be for example like I mean look at Tesla right I mean they're making I guess decent cars good cars perhaps they have you know strong supply chain management obviously uh but they're priced you know right now at a current valuation I think it's let me see one sec so they are priced at board earnings of 173 and their current PE is 385. So you're paying 385 times um the earnings amount essentially which is insane. Like that's a crazy multiple and on a forward basis you're paying 173 times their forward looking earnings, right?

[00:09:09]Um let me go back to my diagram here.

[00:09:13]Yeah. So um in the example here for examp you might have like EPS growth of 20%. But the price to earnings ratio contracts from 40 to 20, right? This might mean a company's growing for, you know, a couple years perhaps, but the market no longer sees them as being viable longer term. Like SAS names, for example, have been cut in half, a lot of them, because the market has deemed that AI will essentially make them, you know, not as useful. Um or maybe it will shrink their market overall because someone else can vibe code the same you know app as like Salesforce or service now or like a workday for example right or Atlassian and that's you know obviously hyperbolic and narrative perhaps but the point is multiples can contract for many reasons when the narrative gets less exciting what happens you're like ah you know what I'm not as excited anymore about this company I'm not going to pay that much more money for it right the story isn't there for me to kind of talk about with my friends and family and co-workers perhaps, right? Whereas the narrative around you know like um a SpaceX or you know a Tesla in the past for example or something like stock those narratives can get can get very very exciting and you might see like these thoughts in your head of like the futuristic narrative where we're using you know uh rockets to go to Mars and we're colonizing Mars. I mean it might happen but it also might not happen right? Uh and so that's why investor sentiment really drives these outcomes.

[00:10:44]So in this case of a good company, bad investment, you might have a stock falling despite having strong fundamentals. A good example of that is Salesforce, right? Recently it's it's fallen from like 300 plus down to $200 per share. Um strong fundamentals overall. Earnings are still growing, but the price is down like oneird pretty much. So you get multiple compression there. Previously they had a multiple on average of like 30 roughly a PE ratio.

[00:11:09]They're at a forward multiple of like 12 right now. Then you might have a bad company which is a great investment right weak business with no earnings growth but price for failure right EPS growth is flat but the P rer rates from like 5x to 10x for example right and the stock price doubles despite having poor fundamentals. We've seen it time and time again. Um, and so in this case, multiple expansion drives the entire game. Now, I won't really harp too much on this anymore, but we'll go over some examples and look at kind of how to analyze PE multiples, right? So, looking at um, you know, PE multiples here, right?

[00:11:46]For example, you can use Finiz, it's not a bad way to look at things, but um, historically, look at the Schiller PE, which tells you the valuations of the broad markets as a whole. historically you can see right now it's at u multiple.com mm multpl.com and you can see different ratios here so you can see like for example the S&P 500 PE ratio the shiller PE ratio uh 10ear treasury rate etc etc and you can see over time how expensive the market is or how cheap the market is now some argue that you know because we're a very very techheavy market that we justify higher valuations because we have more efficiency and therefore greater margins overall, which makes sense in some respect for sure, but looking at averages, typically we gravitate back to this average. If you were to draw a line across this chart, you'll end up somewhere back around like the 20 mark over time, right? So, we always typically revert back to that 20 area.

[00:12:43]Um, and right now we're at a, you know, P multiple of like 33. Um, the the average is like 16. The median is 15.

[00:12:53]Obviously the max was during the financial crisis and the minimum was I guess you know 100 plus years ago right?

[00:13:00]Um the Schiller P is a different valuation metric. U you can see it says over here P ratio is based on average inflation adjusted earnings from the previous 10 years. Right? So this adjusts for inflation and now we're pretty much trading at the same valuation we were at during the dot bubble as well. So you can see why people are apprehensive about being heavily long overall right now. Um and this is kind of why you got to understand valuations and also where valuations can perhaps lead you to opportunity.

[00:13:36]So for example, if you go to a screener here, right? And and again, uh you can go to any screener. You can use whatever. I prefer Finn Viz. It's pretty easy to use, but um you can go to market cap and adjust there. Typically, you want to avoid looking at small caps. Um, I usually go to mid, large or mega.

[00:13:53]Large or mega will have more liquidity.

[00:13:54]You know, they'll have option chains.

[00:13:56]There's more optionality and how to how to um express your ideas on that. So, let's take look at, for example, like mega caps, right? There aren't that many mega caps overall. Um, they're only about what, like 80 of them or something like that. These ads 73 mega caps, right? Above $200 billion market cap. But if we if we look at them individually um as companies, you want to look at valuation here, right? And so you can look at PE or 4P as well. Now the problem is you don't want to use P multiples to compare assets across different sectors. You want to compare assets in the same sector because it it'll pretty much it's a very useful statistic to use to tell you how expensive or how cheap a company in a given sector is. The reason being is that not all sectors will have the same multiples. Like for example, banking sectors, bank stocks will have much much lower multiples. Telecom stocks will have much lower multiples. The reason being is that they don't really have much opportunity for growth. Like think about like an AT&T for example, right?

[00:15:00]They operate in the US uh only, I believe. They're not in Canada. I know that um they have a finite market.

[00:15:07]There's only so many people that live in the US that can pay for a cell phone plan, right? They don't have a a monopoly, right? So they can only grow so much and as a result they're kind of capping their growth. very mature and so what'll happen is that they'll pay out dividends um as a form of returning value to their shareholders like that right whereas more established companies will will I mean newer companies sorry will take their earnings and reinvest heavily which is what you know we've seen recently in the last few years especially as we discuss you know the capex which I mention all the time on um the mag seven names right so like looking at you know the capex across the X7 you can see that these companies are investing all their earnings pretty much all their free cash flows are going back into capital expenditures right they're investing in in more infrastructure you know data centers and like R&D perhaps right moonshot projects so this is where companies that that want to keep on growing perhaps they're already very obviously very well established Google Meta Tesla Amazon Microsoft Apple etc right Nvidia is in there as well but they're already very well established but they can keep on growing perhaps if they keep on investing um correctly obviously, right? Like we saw Meta burn like $130 billion on the metaverse. That was a terrible investment. They got like zero ROI on that. Basically, they just took an entire year's worth of earnings plus all that cash, tossed into a huge barrel, poured gasoline all over it, and lit it on fire. Right? That's the way you got to kind of view it. Um so going back to what I was mentioning about looking at different stocks in different sectors uh it's over here right so you have let's say for for example a bank stock right so you go to wells Fargo you go to financial banks diversified right you can see that if you go to uh mega cap here it's only about what seven bank stocks here you go to valuation you'll notice that they all have very similar valuations you know the highest valuation right now is RBC uh at at 17 PE. But if you're to average them out, you probably need somewhere around like 14ish perhaps, right? Which means that these names are perhaps overvalued and these names over here perhaps undervalued somewhat. Um JP Morgan somewhere in the middle, I guess. The 4P is an important metric to look at because it tells you what a company is planning on doing in the year going forward based on guidance, right? So the four the 4 P multiple reflects an expectation of higher earnings perhaps in the case of a lower 4 PE relative to the current PE or a lower earnings expectation in the case of a higher forward PE relative to a current PE right then you also have something called a PEG right which is a price earnings to growth this tells you how fast uh a company is is is pretty much earn um growing their earnings essentially right because it's it's a PE ratio divided by their growth multiple overall. So again, very good metrics to look at when you're analyzing to find opportunities in the market, right? So you might look at, you know, mega caps.

[00:18:10]Banks are kind of boring in my opinion, but let's say we go to a name like I don't know like let's go to um like service now, which which we mentioned recently a fair bit. So we go to service now. We see the for PE is 25, the PE is 75. If you go to software applications over software applications over here, we can see if you go under under um large caps, which is a lot more names, you only really have about what like 30 names roughly. And then if you go to valuation and you look at P multiples, you can see who the cheapest name is out of the bunch, but also compare their fourp. So for example, you have PTC over here, which I don't really know what it is, but PTC Inc., they have a PE ratio of 13.4 four and a 4 P of 16.3. This tells you that they're not growing their earnings very well overall. And as such, the price is probably going to be depressed if I look at the at the chart.

[00:19:04]And sure enough, it is because no one's really excited about the the stock right now because they're not growing their earnings, right? So, you can see that the price target is average price target based on analyst price targets again kind of meaningless, but 184 overall.

[00:19:18]Nonetheless, this tells me pretty much I'm not excited about looking at this.

[00:19:21]Therefore, I would pretty much disqualify it as a potential investment opportunity. Right? Obviously, if information changes to change my the overall narrative, get people excited, again, that's a very different story, right? Uh a name here like Adobe, right?

[00:19:36]Um their 4P multiple is less than 10.

[00:19:40]That looks very cheap at the surface, right? As long as their earnings keep on, you know, remaining steady and they're growing their earnings somewhat, this could be a pretty cheap company.

[00:19:49]And a lot of people ask me questions about this because they say, "Hey, Adobe's beat the crap. Should I be buying them?"

[00:19:56]Right? I mean, they were at $360 per share not too long ago, only about five months ago. Now they're at, you know, 260 roughly. So big valuation change.

[00:20:06]But again, this is all based upon the narrative shift that AI will make a lot of these companies or their products and services or some of their products and services somewhat obsolete.

[00:20:18]So, um, my screen's frozen, I think. No, it's not. Um, yeah, as you comb through, you can you can sort by for PE and look and see what names kind of pop out to you. You might see like a docu sign, for example, you know, there's workday.

[00:20:33]These names to me have less risk. They might fall into the category, if you go back to that chart I posted, right? they might fall into the category over here of u not a bad company but an okay company and a good investment right uh I'm not saying they have weak weak business or anything like that right but the thing is is that because they're so depressed already and the market's so negative on them already any change in their in their earnings potential or um anything that they say positively reflect you know optimism on the company from from management that will elicit a change in narrative on the market participant perspective of the company which will then elicit perhaps money flowing into that name, right? We've seen that happen the last few weeks with u software stocks, right? Um it's happened pretty handily where everyone was saying, "Yeah, software is dead."

[00:21:26]And what happened? Software sold off heavily from a high of 115. It was down 37% at the low. But if you caught somewhere in the low, even if you caught like the average support area somewhere around here, like 8250 roughly, you would still be up right now from this point by about 26%.

[00:21:47]Which is why it's very important to look at not the most hype companies because hype can drive a name higher for a long time. I mean, look at Tesla for example, right? Tesla has gone higher even though the fundamentals are totally detached from reality. Um, they've made made more money from selling stock than they have from selling cars. Like profit-wise, that's that's a fact. Um, so you know, like you look at this and you're like, okay, like when is this going to come back down again, right? No one really knows. I'm not saying to go in short names, right? But again, we're looking at how to value companies and how to look at valuations.

[00:22:21]So, back to the um, where is it? There we go. Uh, back to the the P multiples over here, right? Again, looking at four Ps, you can scan here and pretty much deep dive into companies that look kind of interesting. You want to look for a 4 P that's typically less than the PE, meaning that earnings are going to be growing going forward, right? Um you also look at the PEG ratio as well and see where you're finding a much much higher growth rate on a given company.

[00:22:50]Like here you have like um Grab Holdings. They do delivery services kind of like Door Dash, you have HubSpot, you have Atlassian, Workday, right? So these names look kind of interesting obviously. I mean Brad is what three three bucks a share roughly. Um the valuation here is like $15 billion market cap. They have sales of like three and a half billion. Um the question is like will they grow their sales ever again, right? given that it's pretty pretty heated market where there's not many barriers to entry overall and you know the margins are pretty thin. It's not like a super exciting business overall. But this could be an opportunity where you might say you know what no one else is looking at grabb no one's optimistic on it. One small pivot in their business to to to the upside and all of a sudden they go to like five bucks right and you make return of whatever 30 40% on your investment. Um so again could be a bad a bad company perhaps or you know poorly run company but um could be a good investment because it's just so beat up overall.

[00:23:55]Um so again different sectors have different valuation metrics. If you were to like average across the pees across these SAS names you'd see you know the multiples probably be somewhere around like perhaps 40ish right multiples probably somewhere around like I guess yeah maybe like 30 or 40ish. um you typically don't want to be paying too much overall for for lack of growth because it means that you're paying for a company that's not growing and that presents a lot of risk. So alternatively when when you have corporations like let's say like Marbell right so Marbell today popped I think like 25%.

[00:24:32]uh because 30% for today right all because Jensen Hang said u they should be a trillion dollar company right they're currently worth $250 billion as a company right um the current PE is 98 97 uh 4 P is 40 47 roughly the valuation here is like is pretty rich you're paying 46 four times earnings and we have an increase in share price of 30% because Jensen Huang said that Marll is an extillion essentially, right? I mean, it maybe may maybe be the case perhaps, right? But again, the risk is much higher here because any misstep in execution will elicit a a hard hard correction to the downside overall.

[00:25:15]Um, yeah. So, as an investor, you want to look at obviously the market cap, you want to look at the um the sales, which are the overall revenues, and then the net income, which is the profit overall, right? um to kind of scan you can look at P multiples more or P multiples are better to look at because obviously they give you a um good taste for what's happening in the future and then furthermore you want to look at perhaps the PEG ratio as well. Um and then obviously you want to compare each individual PE to their peers. So if you go to for example semiconductors here and we look at there aren't that many across the whole market. is, you know, a fair number of them. But if you go to, for example, uh, large cap, we can see how many there are here, only one page. If you go to mega cap, which has many more, right?

[00:26:04]So, many less overall, you only really have 11 names here. And again, looking at valuation and you compare them, the pees are pretty rich across the board.

[00:26:14]Like the lowest PE is is uh Qualcomm at 26. Their 4P is 23. If you guys recall a few uh I think it was about a month and a half ago roughly, I did a little presentation in one of our morning meetings talking about um Qualcomm being one of the most undervalued chip stocks.

[00:26:30]They had a 4P of like 12. Now they're at 23 because the share price has gone from like one was it 130ish to like 240 in the span of you know a month and change.

[00:26:43]So valuation can change very fast. Um, I think that's pretty much it for what I wanted to cover today. I'll uh I'll stop it here, I guess, and and leave room for questions. Any uh any questions here, guys?

[00:27:06]Any questions at all?

[00:27:10]Nope.

[00:27:12]All right, guys. Well, hope that was useful to you. you have any questions at all, to post them in the chat and um I'll post the replay.

[00:27:19]Yeah, Damian, no worries at all. It's a pretty basic topic, right? I mean, people ask me about it. So, um Oh, yeah. Great question. Dr. Claude, yeah, John Claude asked, "How do you view interest rates environments on valuations?" So I mean looking at valuations overall when when you have um rates at lower levels typically that that will elicit much much um higher earning multiples.

[00:27:48]The reason why because like when rates are pulled down um they'll actually sorry when when rates rise they will pull down every valuation multiple because essentially you're discounting the the future earnings by the current interest rate. So uh for that equation you'll have like you know the current price or or sorry current earnings divided by the interest rate. as as the denominator goes up in value, the overall value or outcome goes down, right? So so the multiples actually contract. Uh and as rates go down, multiples expand because money gets cheaper, right? So for example, if if you were given like 0% interest rates, you can go out and borrow money at nothing, no cost, right? What would you do? Borrow all you can and invest it in the market. What happens? Everyone does that. Extrapolate across the globe.

[00:28:39]prices balloon across every asset, right? And the same thing happens to housing prices, you know, commodity prices, gold for example, right? Um, which is why interest rates are a very very important thing to monitor obviously, right? Like you want to look at the two-year and the 10ear yield obviously. Um, and also the Fed funds rate as well. um you might have like two different environments overall um with one company where in a high rate environment for example you might have you know Google, Amazon, Meta etc trading at like mid- teen multiples because money is very expensive. What does that mean for them? If they're borrowing cash, they're they're financing their operations through through borrowing perhaps and in this AI cap X intensive area right now that we're in. They're paying much much higher interest. Therefore, the business is worth less overall, right? And vice versa if rates are much much lower and money is pretty much free. During COVID, there was I think it was like 80 billion or maybe maybe even more than that between like Visa, Apple, I want to say Google and Microsoft. They issued like 40-year bonds. You can Google this. Um, Apple issues 40 40-year bonds.

[00:29:58]Uh, yeah, it was, let me see where it was.

[00:30:03]Yeah, it was right here.

[00:30:08]Uh here's like an internal screen with you guys so you can see like August 14, 2020, right? Apple placed its first notes with a 40-year maturity, right? Um what was it? I think it was like uh so 5.5 billion I believe. Um thought it was more than that. Anyways, if you Google this, like Google COVID goo, you know, um, Visa 40-year bonds, Apple 40-year bonds, Microsoft 40-year bonds, whatever, you'll see that when rates were super super super low, these very astute behemoth companies were like, you know what, we can borrow money from the future at zero cost pretty much, right?

[00:30:56]They're actually going to make money on that because think about it now, right?

[00:30:59]Like they could, for example, take this money that they borrowed at like 1.18%.

[00:31:04]um and invest it in fixed income assets earning like 7%. It's like it's arbitrage pretty much, right? Um so that's why you know rates really have a massive effect on the perspective of the economy or sorry the prospects of the economy and also the market as a whole.

[00:31:21]When rates go higher also the opportunity cost of investing in the broad market stock market is much much lower because you can get fixed income which is guaranteed and pretty much have no risk. Right? the risk is pretty much you need to hold to maturity on on um on bonds, right? That's what it is. But uh when rates come down during like as during as they happened during COVID, what do we see? We saw everything take off like a rocket and inflation absolutely soared because everyone had money in their pockets and they were just buying everything they could.

[00:31:55]Right? When inflation is high, that is theft of uh from the savers.

[00:32:02]Essentially, people that are responsible, that save money, don't really borrow, they get robbed. Uh and the ones that borrow money and are irresponsible, they're rewarded. And when inflation is lower perhaps, and rates are higher uh or at a certain level, that will reward savers obviously and punish those that are that are borrowing uh money perhaps, right? When rates are higher.

[00:32:25]Um, yeah, great point, John Claude.

[00:32:27]Great point.

[00:32:31]Uh, anyone else, guys? Any more questions at all?

[00:32:38]Yeah, that's kind of why why there's a big issue with uh the US debt overall is is that like each year they're compounding more and more. they're getting taking on more and more debt and so the interest payments are ballooning like crazy and over time they'll just become untenable at at a certain point, right? So the question is what happens on a long time horizon if they don't really tackle that debt. Um you could argue that perhaps the country could could default on it. I mean, you know, we've seen crazy crazier things happen in the last few years, you know, pandemic. We saw like the Russia Ukraine war and now we, you know, the Iran war, um, if you want to call that a war, I guess. Um, yeah. Anyways guys, I won't I won't drag on. Um, any questions you have at all, to post them in the chat.

[00:33:25]I'll post a recording of this on online.

[00:33:28]And, um, yeah, see you guys in Discord and have a great day.

[00:33:35]No problem.