When ‘Cheap’ Assets are a Mirage

A friend recently shared his enthusiasm for his preferred cryptocurrency, XRP.

His main argument was that since XRP is priced at only $1.41 per token, it represents a bargain compared to Bitcoin.

With Bitcoin trading at $78,600 per coin, he believed XRP was vastly undervalued at just $1.41. He compared buying XRP now to purchasing Bitcoin back in 2012.

Since my friend lacks extensive investing experience, I took the opportunity to explain a fundamental idea.

I pointed out that the price of any stock or cryptocurrency means very little unless you know the total number of shares or tokens available.

Eventually, there will be 100 billion XRP tokens in circulation. Multiplying that by the $1.41 price gives a market capitalization of $141 billion.

Contrast that with Bitcoin’s fixed supply of 21 million coins. Multiplying by its current price of $78,600 results in a market cap of about $1.65 trillion.

At first glance, Bitcoin appears to be 55,000 times more expensive than XRP based on price alone ($78,600 versus $1.41). However, when you consider the vast number of XRP tokens, the perspective shifts.

In fact, Bitcoin’s market cap is just 11.6 times larger than XRP’s total value.

So XRP isn’t a small, early-stage crypto project. It’s actually huge. And quite possibly still overvalued (sorry XRP bros).

Stocks Too

The same principles hold true with stocks. A low share price doesn’t necessarily mean a stock is inexpensive.

Consider two companies with drastically different share prices, yet comparable valuations.

Ambev (NYSE: ABEV), a Brazilian beer producer, trades at a modest $3 per share. But with 15.5 billion shares outstanding, its market value is roughly $48 billion.

On the other hand, Autozone (NYSE: AZO), a prominent auto parts retailer, has shares priced at $2,902. Yet it only has 16.3 million shares outstanding. Its market cap also stands at about $48 billion.

Despite the sharp contrast in price per share ($3 vs. $2,902), both companies have the same overall worth to investors ($48 billion market cap).

This disparity arises from the differing quantities of outstanding shares.

We must never base investment decisions solely on the unit price of any asset.

A $1 stock can still be remarkably pricey.

Some have told me they prefer owning 100 shares of a $1 stock over a single share of a $100 stock. But ultimately, it makes no difference if the company performs well.

If the stock grows by 20%, the profit is identical either way: you end up with one share worth $120 or 120 shares at $1 each. Both scenarios yield a $20 gain on a $100 investment.

Focus on Fundamentals

It’s clear now that the price alone doesn’t tell us much about an asset’s value.

What truly matters are the fundamental indicators.

We can accurately assess if a stock is cheap or expensive by analyzing its critical metrics.

What is the price/earnings (P/E) ratio? A lower ratio implies a cheaper valuation.
What does free cash flow look like?
How quickly is revenue and earnings growing?
What dividend yield does it offer?
Is the dividend sustainable over time?
Are there issues with the balance sheet? Excessive debt?
Is the leadership stable and meeting targets?
What is the competitive landscape? Is the company disrupting, being disrupted, or just coasting?

We will explore fundamental analysis in more depth soon.

For now, I wanted to clarify the common confusion between price and market capitalization.

Chasing stocks due to their low price is a frequent mistake. While sometimes it pays off, price should never be the main reason to invest.

Instead, growth potential, earnings, and yield are the factors that should attract us—not a bargain-share price.