The Most Expensive Stock – Is It Worth the Money?
Today we’re going to discuss the most expensive stock on the stock market. But we’ll also cover the rest of the top five most expensive stocks. And we’ll ask the question, “In a market full of various metrics, how should we define ‘expensive.'”
The Most Expensive Stock is…
The most expensive stock is Berkshire Hathaway Inc, led by CEO Warren Buffett. Berkshire Hathaway’s stock price is currently sitting around $350,000 per share. The next closest stock in the Fortune 500 list, the S&P 500 index, etc., is Lindt & Sprungli AG, the well-known Swiss chocolate company. Their stock price is around $10,000 per share right now. We’ll talk about the rest of the top five below.
Why is Berkshire Hathaway’s Price So High?
As most companies grow, they decide to split their stocks. Each one stock worth $10 becomes two stocks worth $5 each. This splitting allows stocks to be traded more easily, just like how it’s easier to buy groceries with $10 bills than with $100 bills. Smaller units make trading easier.
Most well-known companies—e.g., Apple Computers, Alphabet Inc., Amazon—have all executed stock splits at some point in their histories. But Berkshire Hathaway has never split. Neither have other poplar companies like Chipotle Mexican Grill. These companies’ value is spread among the small number of shares that they initially went public with. Therefore, the shares are worth more.
However, Berkshire Hathaway did launch “B class” shares in 1996. These shares provide the same result as a stock split. The B shares are worth 1/1500 of an A share. While the A shares cost ~$350K, the B shares only cost ~$230. That’s much more affordable for the average investor.
Berkshire Hathaway A shares were worth $7.50 each in 1962. That’s when a young Warren Buffett first invested in the company. Buffett gained a controlling percentage of the company in 1965 and has been their CEO ever since. The company has grown 46000 times bigger since then.
And because Berkshire has never split their stock’s A shares, they are the most expensive stock on the market.
But what exactly does Berkshire Hathaway do?
What Does Berkshire Hathaway Do?
Berkshire Hathaway is a holding company. Put another way; it’s a company made up of other companies. Berkshire Hathaway has partial- or full-ownership over dozens of other companies, including many that you’ve heard of.
Berkshire wholly owns companies like:
- Fruit of the Loom
- Pampered Chef
- Dairy Queen
And Berkshire has minority ownership in companies like:
- American Express
- Bank of America
Berkshire Hathaway also owns and operates several companies bearing its own name, such as Berkshire Hathaway HomeServices of America and Berkshire Hathaway Direct Insurance Company. You might notice some realty signs in your neighborhood bearing the Berkshire Hathaway name.
Berkshire Hathaway’s “job” is to make sure that the companies it owns perform well. The better those companies perform, the more money Berkshire Hathaway (and its investors) make. It’s “easy” to be the most expensive stock when all your subsidiaries make money for you.
Is Share Price the Best Metric?
Stock market purists would disagree that share price is the best metric for comparing expensive stocks. Why?
It goes back to stock splits. Companies that choose to split their stocks into small fractions will naturally have lower stock prices. And yet, the action of stock splitting does nothing to change the intrinsic value of the company.
Imagine if someone said, “White bread is the most expensive bread. Just look here! This entire loaf of white bread costs way more than that single slice of wheat bread.”
You would argue, “That’s crumby. The wheat bread has been split. Comparing a loaf to a slice doesn’t make sense. Surely we need to evaluate the bread price on some level playing field?”
One interesting side effect of not splitting shares: a small company might end up in a list like this one.
Whether intentional or not, some companies get mentioned in “most expensive stock” articles simply because they’ve never split stocks, and therefore have a very high price.
Good marketing? Or an accidental benefit?
You’re right. So let’s take a look at market capitalization and the price-to-earnings ratio.
Market capitalization is a way of measuring how much money (or capital) a company is worth across the stock market. Total capital in the market = market capitalization.
And the equation for finding market capitalization—or market cap—is easy. Take the total number of shares of a company and multiply by the company’s price per share.
Having a very high stock price—like Berkshire Hathaway—is not enough. A company must combine a high stock price and a large number of total shares.
You, math geeks, might also realize that a stock split does not affect market cap (at least, in rational markets). A company with 1 billion shares at $6 each has a market cap of $6 billion. If that company splits, it will have 2 billion shares at $3 each, multiplying to a $6 billion market cap.
But a company with a huge market cap can still be fairly cheap to buy. And the market cap only tells us about the price. It doesn’t necessarily describe intrinsic value. So let’s bring in the price-to-earnings ratio.
Benjamin Graham—one of the fathers of modern investing—implored his students to understand the difference between price and value. If you don’t know the famous parable of Mr. Market, you ought to read about it!
In short, price is merely an extrinsic opinion that the market decides on. But value is intrinsic and is based on business fundamentals. A Honda Civic might be a good car but is overpriced at $100,000. Its intrinsic value might be closer to $15,000 or $20,000. The cost of car ownership, after all, is difficult to calculate.
But back to stocks. How do we determine the intrinsic value of a stock? One of the best ways, according to Benjamin Graham, is to look at the company’s earnings. How much money did the company make after paying all its expenses? That’s the earnings.
As an investor, you’d want to pay the lowest price for the highest value. Or the lowest price for the highest earnings. That’s where the price-to-earnings ratio comes in. It takes a company’s price per share and divides it by the company’s earnings per share.
A high P/E generally suggests a bad deal. The company has too high a price or too low earnings. A low P/E ratio is the opposite; it represents a low price compared to high earnings.
Let’s go back to the car example. Using price alone, a Lamborghini is clearly more expensive than a Honda Civic. But if the Lamborghini costs $100,000 and the Honda Civic costs $90,000, then you would pause. The Civic is clearly overpriced compared to its value. In some ways, this particular overpriced Civic is the more expensive car.
The Most Expensive Stock By Share Price
We already covered Berkshire Hathaway Inc. as the most expensive stock. Let’s round out the rest of the top five most expensive stocks by the share price. As of January 2021, they are:
#2 – Lindt & Sprüngli AG – $9800 per share
Lindt is a Swiss chocolate maker, famous for its Lindt truffles and Lindor brand of sweets. Much like Berkshire Hathaway, the company has never split its stock.
Lindt provides an excellent example of why the share price isn’t the best metric to measure a company’s value. Their market cap is only ~$20 billion. There are over 100 larger publicly traded companies.
Still, their chocolates are delicious.
#3 – NVR Incorporated – $4000 per share
NVR is an American home-builder and mortgage company. While the COVID-19 downturn was terrible for NVR’s stock, the company has bounced back impressively, now well above their pre-COVID highs.
High share price, sure. But NVR’s P/E ratio is currently about 19. This is generally considered on the low end. In other words, NVR might be a good value investment right now.
#4 – Amazon.com – $3300 per share
Amazon is a company that…let’s be honest, they need no introduction! Unlike Lindt and NVR, Amazon combines a high stock price and a large number of stocks. Therefore, Amazon’s market capitalization is huge—$1.6 trillion! That’s 80 times bigger than Lindt’s. It just goes to show the stock price isn’t everything.
#5 – Seaboard Corporation – $3000 per share
Seaboard Corporation is an agricultural and transportation conglomerate. They produce and transport products like pork, wheat, and sugar. They are perhaps most well-known for their fleet of cargo ships, which is ironic for a company headquartered in landlocked Kansas.
Nevertheless, Seaboard is an expensive stock (per share). On the spectrum of market cap, however, they are quite small. The company is worth about $3.5 billion.
The Most Expensive Stock By Market Capitalization
These companies are, basically, the biggest companies on Earth. They have high prices, tons of outstanding shares, millions of customers, and famous products. So while their stock prices might not be high, their investors are part-owners of the most “expensive” companies possible. If you had invested in one of these companies in their nascent years, you’d be golden! The rest of us are calculating our retirement savings goals one year at a time.
#1 – Apple – $2.25 trillion
Apple is the preeminent smartphone manufacturer in the world. But beyond their famous iPhones, Apple also sells top-of-the-line personal computers, tablets, wearables and accessories, and services. Many of their customers give Apple products a cult-like place on their personal pedestals.
Apple’s market cap has increased more than tenfold in just the last decade.
#2 – Microsoft – $1.68 trillion
Microsoft is famous for its personal computer software suite, such as Word, Excel, PowerPoint, Outlook, and Skype. People use Microsoft to complete daily tasks worldwide to track business expenses and create college presentations. And yes, to write Internet articles.
Microsoft switched to a subscription model in the mid-2010s, and their market cap has taken off since. The company was fairly stable from 2000 to 2015 but has grown almost 400% since.
#3 – Amazon – $1.63 trillion
Amazon is Jeff Bezos’s famous Internet startup-turned-megalith. Many of us order from Amazon every week, see Amazon trucks driving down our streets, or use Amazon’s at-home services to play music or watch TV. Amazon, like the other companies on this list, has integrated itself into our daily lives.
#4 – Alphabet – $1.19 trillion
Alphabet might be the one company on this list that doesn’t ring a bell. Why? Because Google created a parent company in 2015, named it Alphabet, and then made Google a subsidiary of Alphabet. So when you see Alphabet—a Google by any other name.
How does Google make its money? Through advertising. When you surf around the web and use Google’s search engine, they learn about your interests and then sell that information to advertisers. There’s a lot of money in knowing what people search the Internet for.
#5 – Facebook – $0.78 trillion
Facebook—a place to connect with friends, share pictures, and engage in arguments with people you haven’t seen in ten years. But seriously, Facebook is the largest social networking site in the world.
They make their money via advertising, just like Google. While Google uses your in-browser behavior to determine what you might want to buy, Facebook wants to keep your eyes on Facebook. Facebook’s goal is to make its website as entertaining as possible. The longer they keep you on Facebook, the more ads they serve. More ads equal more money.
The Most Expensive Stock By Price-to-Earnings Ratio
As discussed earlier, perhaps the best and truest metric of “most expensive stock” is to look at the P/E ratio. Average historical P/E ratios have fallen around 15. In recent years, average P/E ratios have drifted higher towards 20. Anything about 25 is generally considered overpriced—too high of a price, too low earnings.
But that’s not a complete story. Their potential for future growth defines some companies. Tesla is a perfect example of this. In the third quarter of 2020, Tesla’s earnings were only $330 million (over 948 million shares). That’s about 35 cents per share on the quarter or $1.40 per share over a year. How can a $700 stock price be justified?
Simply put, investors are predicting that Tesla’s earnings will grow larger and larger each year. Eventually, they believe, a $700 stock price will be justified by significant earnings. For a $700 stock to have a P/E of 20, the company will need to earn $35 per share. That’s 25 times more than Tesla’s current earnings. But considering Elon Musk’s rocketry side hustle, perhaps the sky’s the limit for Tesla?
Generally, small companies have higher P/E ratios. They are still growing. They are the puppy with paws much-too-large for their body. But when we see large companies with high P/E ratios, it might be a sign that the company is genuinely overpriced. So let’s focus on the top 5 large companies (in the S&P 500) ranked by P/E ratio (past 12 months of earnings).
#1 – Tesla – P/E = 1400
#2 – Valero Energy – P/E = 940
Both Valero and the next company, Exxon, suffered massive earnings losses in 2020. It has nothing to do with COVID 19. Instead, another global issue occurred.
A long-standing international oil organization—called OPEC—ended their March 2020 summit on bad terms. Russia and Saudi Arabia both felt that the other country was asking for unfair terms. In response, the two countries engaged in a price war, drilling more oil than is typical to drive down the price (and possibly put the other country’s oil industry “out of business.”)
Oil prices fell worldwide, including in the U.S., And companies like Exxon Mobil and Valero have suffered the consequences.
You might ask, “why haven’t the stock prices fallen more since the companies aren’t earning any money?” The answer is that investors believe that oil prices will bounce back eventually and that these two companies will recover. But for now, with low earnings, their P/E ratios remain high.
#3 – Exxon Mobil – P/E = 690
#4 – ServiceNow Inc – P/E = 450
ServiceNow is a cloud computing company based in Santa Clara, California. The company provides an IT service management platform-as-a-service (PaaS) to other companies. The stock price doubled in 2020 based mostly on the possibility of future growth.
As more and more companies go digital (especially amid COVID 19 remote work), ServiceNow is poised to provide IT support to digital and remote employees. The growth potential is massive. But that growth appears to already be priced-in into the stock price.
#5 – Phillips-VanHeusen Corp – P/E = 320
Phillips-VanHeusen Corp is an American fashion and clothes conglomerate. Its 2020 earnings dropped significantly, likely due to COVID 19 and limited consumer fashion spending. Investors remain optimistic that the company’s earnings will rebound—the stock price has increased 200% since March 2020 lows.
Summary of the Most Expensive Stock
How should we think about the most expensive stock? By share price? By market capitalization? Or by price-to-earnings ratio?
Either way, the most expensive stock is a company with a household name. Berkshire Hathaway (Warren Buffett’s company) is the most expensive stock by share price—almost $350,000 per share. Apple is the most expensive stock by market capitalization—$2.25 trillion. And Tesla is the most expensive stock by P/E ratio (at least for S&P 500 companies)—P/E = ~1400.
Investing in stocks at all-time highs isn’t necessarily bad. But keep in mind—the optimism that the market feels towards a company is already considered in the price.
Best of luck and happy investing!
This article originally appeared on Your Money Geek and has been republished with permission.