Stock Prices Don't Tell the Story—Here's What Humphrey Yang Says You Should Focus On Instead

Is a stock that’s worth $100 per share cheap or overvalued? You can’t arrive at an answer just with the stock price. Investors have to review various data points before determining if a stock is fairly valued at its current price. 

Financial guru Humphrey Yang recently shared what goes into valuing a stock and used Nvidia NVDA and Tesla TSLA as examples.

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The Stock Price Means Nothing

Yang mentioned that Nvidia trades at a lower price per share than Tesla. However, that doesn’t mean Tesla is worth more than Nvidia. He told his audience to look at a stock’s market cap to determine the company’s value. Nvidia’s market cap exceeds $4 trillion, while Tesla only has a $1 trillion market cap.

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Nvidia is valued at more than four times Tesla’s valuation, even though Nvidia trades at a lower price per share than Tesla. That’s because Nvidia has more shares in circulation than Tesla. The market cap measures the number of shares in circulation times the trade price. For instance, if there are 10 billion shares in circulation of a stock that is valued at $8 per share, then the company would have a market cap of $80 billion.

Yang revealed that Tesla has 3.210 billion shares in circulation, while Nvidia has 24.49 billion shares in circulation. The large difference in the amount of shares in circulation explains why Nvidia has a lower stock price than Tesla, despite the difference in market caps.

Does The Market Cap Tell The Entire Story?

You will need more than a company’s market cap to assess if a stock presents a good buying opportunity. The market cap simply helps you gauge the percentage of ownership you have in a company. If you have a $1 million position in a company that is worth $100 million, you have a 1% stake in that position. However, you’re more likely to have a microscopic stake in a publicly-traded corporation, especially the companies with market caps above $1 trillion.

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You have to look at a company’s tailwinds. For instance, Nvidia is poised to benefit immensely from the rising demand for artificial intelligence. Tesla faces some obstacles if the demand for its electric vehicles continues to wane, but significant revenue growth from robotaxis and humanoid robots are catalysts worth monitoring.

Investors also have to look at a company’s financial strength. Revenue and net income growth rates are vital for gauging if a stock’s valuation makes sense. You can then compare a stock with its peers by assessing metrics like financial growth rates, P/E ratios, and PEG ratios. For instance, it would make sense for investors to compare Nvidia with Broadcom AVGO and Advanced Micro Devices AMD. It makes zero sense to compare Nvidia to a bank stock since they have different opportunities and growth trajectories. 

See Also: Are you rich? Here’s what Americans think you need to be considered wealthy.

Index Funds And ETFs Make Investing Easier

It takes a lot of research and conviction to pick individual stocks and outperform the stock market. You have to review various metrics and know key details about the companies you buy. 

However, you can also take a simpler route and buy shares in an index fund that tracks a benchmark like the S&P 500. These funds have low expense ratios since they aren’t actively managed, and they have the potential to multiply your money in the long run.

Investors can also consider a mix of individual stocks and ETFs instead of committing to a single type of asset. That way, you have a diversified portfolio that leans into a particular group of stocks.

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