Apr 22, 2021
[2 min Read]
The first thing you want to look at when analyzing a stock is the PE ratio. That tells you the stock price relative to the earnings that each share grants to you as a shareholder. This is important because it shows you where you are as a company. Companies with a low PE ratio generate significant earnings per share, which means that they have to maintain their current incomes to be a good investment. At least to the extent, they are now and perhaps grow it a little bit over time. Companies with a high PE ratio need to increase their earnings in the foreseeable future to be a worthy investment. Companies like Uber or Snapchat with an extremely low ratio show that their revenue is growing and will continue to grow in the future, and that's why they're priced accordingly. That's why analyzing a company with a high PE ratio or a low PE ratio results in entirely different results and may require further analysis. For GEVO, which has negative earnings, one would expect revenue to start to grow soon to match the current market cap (not stock price) and even exceed it since we discount the company's cost of capital. As a note, the actual stock price is irrelevant; it doesn't matter if a stock is $1, $10 or $1000. What matters is the company's market cap, and that's because share prices relative share numbers are arbitrary; what matters is the total worth of the company relative to the total earnings.
Individual shares are just a way of measuring that, more so on an individual level. Now the question is, is GEVOs Net income growth enough to justify the present value of its $1.2B market cap? I calculated the net income to be around -40M in 2020 (I had to calculate this as I could not find it on the annual report). This decreased 40% from the year before; this could be attributed to the COVID 19 Pandemic, so it can be written off. Looking at 2018-2019, we found that net income also dropped in that time frame by 2.5%. Looking from 2017-2018, net income fell 14%. We would have to go back to 2016 to see positive growth in net income. Why then has the market cap grown exponentially in that period if GEVO has shown an inability to increase its profits? I feel as the market has them significantly overvalued and is over-optimistic on the company's future financials. On another note, the company has stated, and obviously so, it has no plans on starting to declare dividends any time within the foreseeable future (since they will be at a loss for the foreseeable future). For GEVO to be undervalued or even fairly valued, they would have to see a drastic increase in revenue and subsequently profit within the foreseeable future. Given the rate of revenue growth and reasonable expectations, it is implausible that they will grow into their evaluation in the coming years. Thus it is not a worthy risk to reward ratio, and I would not go long on this stock.