Stocks change price every day, but that doesn't mean the value of the underlying business changes with it. Because of this disconnect, investors have opportunities to buy shares at a better valuation when share prices have declined, but the overall business results stay the same or have improved. Even if share prices go up, a stock might be "cheaper" from a valuation perspective if the business results have improved more than the price of shares.
On a Fool Live episode recorded on March 12, Fool contributors Brian Stoffel and Brian Withers compare valuations for MercadoLibre (MELI -10.25%) and Sea Limited to see which stock would be "cheaper" today.
Brian Withers: We're looking at valuation, and I know there were some comments in the queue about valuation. I want to look at revenue growth along with that, because valuation in isolation, I think is a very limited way to look at stocks, especially when the market pays up for quality. Let me show you what we got going here.
Both Mercado and Sea Limited have about $4 billion in trailing-12-month revenue. Sea Limited is losing a lot more money. MercadoLibre was profitable a couple of quarters, but for the year that they weren't. MRQ is the most recent quarter. Revenue growth is similar. They're both knocking it out of the park, but look at the market cap here. Sea Limited is marked considerably higher, which draws their price to sales ratio higher. Then they post any N/As here because not only do they not have earnings now, but analysts haven't projected earnings in the future.
Just looking at these numbers, and valuation, and isolation, and I know that's not something that you like to do, Brian, but it looks to me like MercadoLibre is really a good deal at this price, even at a price of sales ratio of 18. For comparison, Amazon is four. It's possible that this could decline over time and it's likely it will over potentially years, but I would think MercadoLibre would grow into that and it'll continue to be a great stock to own.
What do you think when you see these numbers, Brian?
Brian Stoffel: I agree. For me, if a company is mission-driven, has a wide moat and optionality, if it's got financial fortitude, and it's run by its founders, which both of these companies are, who are heavily invested in it, I don't care about valuation. I've made more mistakes worrying about valuation than good decisions, but if I have to choose, I think that MercadoLibre's valuation is definitely more favorable, but that wouldn't stop me from buying either one of these stocks.
Withers: Yeah, I agree. Sea Limited may be a little bit more expensive. I think part of it, it's getting a little credit for its gaming division, which the financials look a little bit like a SaaS company, so some 40-plus percent of its business is centered around this gaming segment, which is highly profitable and has tremendous gross margins and it's able to fund the business. It's getting a little credit for that too.