June 2018

The Hype of the Market

By Ray Mullaney
Originally published in Senior Digest

“Who Ya Gonna Believe, Me or Your Lying Eyes?”
-attributed to Groucho Marx and Richard Prior

How do you know how much to pay for a share of stock? – I’ll get to that next month.

But this month, let’s review “how to evaluate the performance of a company”. I don’t mean look at its share price, let’s evaluate the actual changes on the balance sheet of a company.

Let’s review the average performance of Amazon, Apple and Microsoft over a three-year period, starting with what we now see on their financial statements on 5-15-15, 3 years ago.

Rather than look at them one by one, I’ve added their three primary measures you can read on their income statements and balance sheets.

5/15/2015 5/14/2018
($ in billions, except
per-share figures)
AMZN AAPL MSFT Sum AMZN AAPL MSFT Sum % Chg.
Revenues $92 $95 $212 $399 $193 $199 $247 $539 35%
Liabilities $39 $87 $132 $258 $95 $166 $241 $502 95%
Tangible Book
Value
$7 $61 $120 $188 $18 $35 $127 $180 -4%
Price per share $431 $48 $126 $1,603 $98 $189
Price of Whole
Company
$200 $391 $725 $1,316 $778 $751 $927 $2,456 87%
Price to Sales 330% 456%
Debt to Revenue 65% 93%
Debt to Tangible
Book Value
137% 279%

These three companies have averaged 35% growth in their combined revenues over the last three years – not bad. But the price of that revenue growth was very high: their debts nearly doubled over the same period. Furthermore, instead of growing, their tangible equity actually declined! Are these really the signs of companies in pristine financial condition?

There are many other companies on the market which would make better investment opportunities. We found ten with comparable price-to-sales ratios: Durect, Pure Storage, Akamai Technologies, Vanda Pharmaceuticals, Grand Canyon Education, Trex Co, Heska, SPS Commerce, OraSure Technologies and Financial Engines. Unlike the Apple trio above, these companies experienced real growth:

10 Smalller Companies ($ in millions) Apple, Amazon & Microsoft ($ in billions)
5/15/2015 5/14/2018 5/15/2015 5/14/2018
  Sum Sum % Chg. Sum Sum % Chg.
Revenues $4,100 $6,428 57% $399 $539 35%
Liabilities $2,386 $2,686 13% $258 $502 95%
Tangible Book
Value
$2,875 $4,556 58% $188 $180 -4%
Price of Whole
Company
$21,974 $33,826 54% $1,316 $2,456 87%
Price to Sales 5.36 5.26 3.30 4.56
Debt to Revenue 58% 42% 65% 93%
Debt to Tangible
Book Value
83% 59% 137% 279%

Growing debts, growing equity and debts growing much slower than either of them: these companies are much safer than Apple and co.

Next article, “Gee, how far can you spit anyway?” Aunt Angie.