How can investors use market capitalization as a valuation measure?
Market capitalization, or market capitalization for short, is a measure defined as the number of outstanding shares of a company multiplied by its share price. This measure can be used to compare companies in the same industry. On a Fool live episode recorded April 14, Fool contributors Brian Stoffel, Brian Feroldi and Brian Withers answer a viewer’s question on how to use the measure of market capitalization to think about the future potential of a stock.
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Brian Stoffel: I have one here from [viewer] Father FI said, “Can you explain to us how you use market cap as a valuation measure, is it all about bigger being better, or is there a sweet spot that you like?
Yeah, basically what you gotta do is spend some time in an industry to get a feel for how big a business can become. When Netflix (NASDAQ: NFLX) pivoted to becoming a streaming company and having their own content and then valuing them to the same level that a Blockbuster might have been 10 years earlier no longer made sense as they were creating their own content. You went on to say, maybe Netflix could be so important to say, there’s Disney sit at that market cap and here’s Netflix here. I could see how it could turn out. With Lemonade (NYSE: LMND), what I’m talking about is a $ 5 billion company, which in the public markets is considered a small to mid cap. But you can look at some of the bigger insurers and see that they are much more valuable. Then you can say, “Okay, I can see how Lemonade could become a much bigger valuation.” Again, the reason I chose market cap is because Brian Feroldi said it’s a really hard company to figure out what its growth path might be. like.
Brian Withers: Yes, and the market caps as you say they vary a bit. I remember when I first watched Netflix and thought of them as the Blockbuster replacement. Blockbuster, the biggest he ever got, was $ 6 billion. Netflix has far eclipsed that today. Definitely comparisons with Disney and other content studios, as well as streaming services. It’s in a category of its own now.
Brian Feroldi: If you go back in time and say, if you compare the market cap of Amazon at Walmart and said, well, that’s the limit.
Feroldi: You were wrong in 5X and in counting. But I think watching this is extremely helpful. I just realize it’s not a one-to-one thing. Lemonade is a five billion dollar business I watched like Progressive Insurance. I realized that it was not an individual competitor, but that it was a $ 55 billion company, for example. Do you think Lemonade could be as successful as Progressive? Obviously with a totally different business model. Is it out of the question to think that Lemonade, if it does so well, could be as big as Progressive is today?
If you think the answer is yes, then it could be 10x from today, for example. My favorite is when I find a business that meets all of my criteria and is tiny. If it’s less than $ 500 million, for example, you’re thinking, wow, this thing might 10x and be even smaller than lemonade today. As is my favorite.
Withers: Yeah, it’s harder and definitely riskier to call whether they take that leap or not.
Feroldi: We had a question here about Coinbase (NASDAQ: PIECE), for example. If we are going to talk about it. So Coinbase just went public today and so Yahoo! is correct, which I don’t think so, but I think it’s about correct. Market capitalization today is $ 86 billion.
Feroldi: Yes. What do you compare that to. good Charles Schwab is $ 127 [billion]. He’s basically as tall today as Charles Schwab. Is this a one-to-one comparison? I do not know. I mean, in theory, Coinbase could add customers globally, right? Is Charles Schwab more restricted? Well i dont know.
Stoffel: I think Intercontinental exchange, which has a ton of global markets, including the New York Stock Exchange, is only $ 66 billion.
Feroldi: Yes. Coinbase is bigger than the.
Feroldi: Than the NYSE. What would you say Nasdaq? How big is the Nasdaq? I don’t think the Nasdaq equals $ 20 billion or $ 25 billion, yes. Coinbase is the size of the Nasdaq and the NYSE. The companies, not all of the companies on these exchanges, but the companies themselves.
Needless to say, it’s big. It’s really big. Can you see Coinbase turning into a trillion dollar business?
Stoffel: This is a great way to use market capitalization.
Feroldi: Yes. For Coinbase at 10x as of today, it would take a trillion dollar business. Can this happen? I do not know. Perhaps.
Withers: Perhaps. Yes.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Brian Feroldi owns shares of Amazon, Netflix and Walt Disney. Brian Stoffel owns shares of Amazon. Brian withers owns shares of Lemonade, Inc. The Motley Fool owns shares and recommends Amazon, Intercontinental Exchange, Lemonade, Inc., Netflix and Walt Disney. The Motley Fool recommends Charles Schwab and Nasdaq and recommends the following options: January 2022 long calls at $ 1920.0 on Amazon and January 2022 short calls at $ 1940.0 on Amazon. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.