The Market Has Lost Its Mind With These Stocks

The stock market is full of irrational exuberance and wacky prices, both high and low. One of the keys for Foolish investors is to be able to decipher which stocks are the best values from the stocks that are way overvalued.

Any stock can be analyzed and painted as over- or undervalued when standing on its own, but sometimes a comparison analysis tells a better story. When a company is growing faster and more profitably than a competitor or industry rival, it should give us pause. Below are three such comparative valuations that made me take a step back and ask some questions. I've tried to find stocks that have similar prices to make the comparison a little easier.

The battle of stock market darlings
There is no debate that Apple (Nasdaq: AAPL  ) and Netflix (Nasdaq: NFLX  ) have both treated investors very well over the last few years. Both Motley Fool Stock Advisor picks have enriched investors, but when you compare their valuations, I'm left wondering how Apple isn't even higher.


Stock Price

Earnings per share (TTM)

1-Year Revenue growth rate (TTM)

Apple $347.60 $21.31 71.1%
Netflix $236.41 $3.60 34.9%

Source: Capital IQ, a division of Standard and Poor's. TTM = trailing 12 months.

Not only does Apple make six times more in profit per share, it also grew revenue twice as fast last year. I will also point out that Netflix has only about $45 per share in revenue (based on average weighted shares outstanding), so unless it expects to reach a 50% net margin -- it's at a bit less than 8% right now -- Netflix won't be catching up to Apple.

The exuberance around Netflix is at an all-time high, but has it become irrational at this point?

Gambling on Macau vs. Las Vegas
There are two sure things we know about the gaming market as investors: Asia is the future, and Las Vegas is the past. Sin City had a nice run until the recession, but with states trying to grab gaming tax revenue, gambling dollars are being spread around, and the city doesn't have the draw it once did.

Macau, on the other hand, is the only place in China where gambling is legal, and gaming companies are raking in cash there. MGM Resorts (NYSE: MGM  ) gets a piece of that action, but it owns a 50% stake in a single casino, whereas Melco Crown (Nasdaq: MPEL  ) owns two casinos itself. That means revenue growth for Melco Crown leaves MGM in the dust.


Stock Price

Earnings per share (TTM)

Revenue growth rate (TTM)

Melco Crown $10.63 ($0.02) 98.2%
MGM Resorts $14.45 ($3.10) 2.2%

Source: Capital IQ, a division of Standard and Poor's. TTM = trailing 12 months.

Gaming earnings are driven by revenue growth as casinos pay off massive investments to build resorts, so don't think that negative earnings per share means negative cash flow. But as you can see, Asia is the place where most of that growth has taken place. As a result, Melco Crown is almost back to breaking even, while Las Vegas Sands (NYSE: LVS  ) has turned positive cash flow into positive earnings. MGM has a ways to go before turning earnings-positive and has to rely mostly on Las Vegas to get there.

Chipping away
Intel is still one of the most puzzling valuations on the market to me. Despite its size, Intel (Nasdaq: INTC  ) is still growing revenue faster than the much smaller Advanced Micro Devices (NYSE: AMD  ) and has a treasure trove of cash to top it off. With P/E ratios that are very similar, that tells me the market has something against Intel.


Stock Price

Earnings per share (TTM)

Revenue growth rate (TTM)

Intel $22.76 $2.20 20.6%
AMD $8.94 $1.01 12.6%

Source: Capital IQ, a division of Standard and Poor's. TTM = trailing 12 months.

The much larger Intel may not have quite the upside that AMD does, but Intel also has $12 billion in cash and short-term investments, so downside risk is lower as well.

Valuation matters
What you pay for a stock matters, and I've shown three examples of stocks I think are cheap relative to competitors.

Fool contributor Travis Hoium owns shares of Melco Crown and is short MGM Resorts. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Intel is a Motley Fool Inside Value and Motley Fool Income Investor pick. Apple and Netflix are Motley Fool Stock Advisor recommendations. Melco Crown Entertainment is a Motley Fool Global Gains pick. Motley Fool Options has recommended a bull call spread position on Apple and a diagonal call position on Intel. The Fool has bought calls on Intel and owns shares of Intel and Apple. Alpha Newsletter Account, LLC has bought puts on Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 10, 2011, at 10:56 PM, ConstableOdo wrote:

    Look for Netflix's share price to pass Apple's in a year based on current share percentage growth over the last six months. Since mid January, I think Apple has gone up the amazingly outstanding sum total of $1. For a company that's earning more money than most companies can imagine, shareholders that came in at that time are getting almost nothing in return. In that same time frame, Netflix shareholders have made a tidy sum of $50 per share. So from that short-term view, I would definitely say that Nextflix shareholders made a far better investment from a company far weaker than Apple.

    Still, the only thing that matters to an investor is how much money you make, not how much money the company makes.

  • Report this Comment On May 11, 2011, at 6:00 AM, pryan37bb wrote:

    Well, don't forget that AAPL is trading for only about 11 times forward earnings once you back out its cash, and that it has enough to buy NFLX four times over.

  • Report this Comment On May 11, 2011, at 7:08 AM, CMFSoloFool wrote:

    There is no doubt that NFLX is overvalued and expensive. The term I have heard in such cases is "priced for perfection". As a value investor I see these multiples and cringe. I'm long on Apple (a lot) since $87, and Intel since $18.95. I think both will reward, and both will outperform.

  • Report this Comment On May 18, 2011, at 12:57 AM, CMFSoloFool wrote:


    AMD was a full generation behind Intel (technologically) before Intel introduced the 3D chip architecture. This puts them even further behind. Fusion is mostly hype to grab some headlines because they know Intel is burying them. Intel dominates over 80% of the market, and with the new 3D architecture it will widen the gap even further.

    Check this Passmark test site to see a comparison between Intel and AMD:

    Even in the midrange market, Intel's dual cores outperform AMD's triple cores. The AMD Phenom2 X2 565 is a pretty good chip, but virtually runs neck and neck with Intel's E6600, which is $27 cheaper ($82 vs. $109).

    I don't give stock picking advise, but I would sell any AMD stock if I had any. Fortunately, I don't.

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