Is it cheap? Why "dilution" is a concept you NEED to understand
Many newbie investors get in trouble because they don't understand the relationship between share price and share count. If you're new to investing and you've never heard of "dilution," it's very important that you keep reading this post.
If I look at a standard chart of Spirit Airlines's share price, such as a upper chart above, I might conclude that the stock is cheap right now. Spirit shares are trading well below the price they've traded at for the last five years.
This is an illusion. The valuation of a company is its share price times the number of shares outstanding. When a company runs low on cash, it sometimes issues and sells new shares. This "dilutes" the ownership percentage of existing shares.
Imagine I have a pie, and I've invited you and two other people over for a piece. We're each going to get a quarter of a pie-- a really big slice! But then you decide to invite a friend. The size of the pie doesn't change, so now we have to cut it in fifths so your friend can have a slice. Each of us will get a smaller piece.
Issuing new shares works the same way. Since the beginning of the Covid-19 pandemic, Spirit Airlines has issued 29.14 million new shares, increasing its share count by 42.5%. That means that each share now represents a much smaller proportion of the company than it used to. The shares have been "diluted."
Because of dilution, looking at a chart of the price of a single share doesn't tell you how "cheap" or "expensive" a company is compared to its historical valuations. Fortunately, there's a quick and easy way to chart a company's actual valuation.
Share price multiplied by shares outstanding equals the company's total price tag, its "market capitalization" or "market cap." To chart market cap on TradingView, find and click the button labeled "fundamental metrics for stocks" at the top of the chart. Type "market" in the search box, and TradingView will narrow the list of metrics down to the one you want. Clicking on "market capitalization" will add a time series of the stock's market cap to your chart.
When we look at market cap for Spirit Airlines, it doesn't look cheap anymore. Spirit is trading within its price range of the last four years, even though the company is now financially worse off in every way. With earnings negative and sales nearly cut in half, Spirit is priced as if the pandemic had never happened. By charting market cap, you've adjusted for dilution and gained a much better understanding of the asking price.
If I look at a standard chart of Spirit Airlines's share price, such as a upper chart above, I might conclude that the stock is cheap right now. Spirit shares are trading well below the price they've traded at for the last five years.
This is an illusion. The valuation of a company is its share price times the number of shares outstanding. When a company runs low on cash, it sometimes issues and sells new shares. This "dilutes" the ownership percentage of existing shares.
Imagine I have a pie, and I've invited you and two other people over for a piece. We're each going to get a quarter of a pie-- a really big slice! But then you decide to invite a friend. The size of the pie doesn't change, so now we have to cut it in fifths so your friend can have a slice. Each of us will get a smaller piece.
Issuing new shares works the same way. Since the beginning of the Covid-19 pandemic, Spirit Airlines has issued 29.14 million new shares, increasing its share count by 42.5%. That means that each share now represents a much smaller proportion of the company than it used to. The shares have been "diluted."
Because of dilution, looking at a chart of the price of a single share doesn't tell you how "cheap" or "expensive" a company is compared to its historical valuations. Fortunately, there's a quick and easy way to chart a company's actual valuation.
Share price multiplied by shares outstanding equals the company's total price tag, its "market capitalization" or "market cap." To chart market cap on TradingView, find and click the button labeled "fundamental metrics for stocks" at the top of the chart. Type "market" in the search box, and TradingView will narrow the list of metrics down to the one you want. Clicking on "market capitalization" will add a time series of the stock's market cap to your chart.
When we look at market cap for Spirit Airlines, it doesn't look cheap anymore. Spirit is trading within its price range of the last four years, even though the company is now financially worse off in every way. With earnings negative and sales nearly cut in half, Spirit is priced as if the pandemic had never happened. By charting market cap, you've adjusted for dilution and gained a much better understanding of the asking price.
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