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As I understand it, market cap is the perceived worth of a company to the market. It’s derived from share price and shares outstanding, and I’m curious if it can be correlated to what share price a stock may rise to.

If a stock is trading at $0.30 and has 3B shares outstanding, I would think that by examining its market cap at various share prices, one could determine how much potential share price growth is reasonable.

In other words, with 3B shares outstanding, it’s current market cap $900M. This is reasonable for understanding it’s business. But to assume it could reach $1 or even $1.5 wouldn’t make sense.

Is my thinking flawed regarding how I analyze a companies market cap and shares outstanding?

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    "It’s derived from share price and shares outstanding". It's nothing more than multiplying those two numbers together.
    – RonJohn
    Jun 13 at 22:08
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I’m curious if it can be correlated to what share price a stock may rise to.

Well, it may rise higher, but the current market cap is absolutely no indication that the share price might increase.

If a stock is trading at $0.30 and has 3B shares outstanding, I would think that by examining its market cap at various share prices, one could determine how much potential share price growth is reasonable.

Since market cap is just share price multiplied by shares outstanding, there's no analysis to be done; it's a straight -- and quite trivial -- linear function.

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  • I’m not talking about how it’s computed. What I am talking about is if computing potential market caps is another way to use stock statistics for determining how much growth a stock could have. Let’s assume a stock will grow, it’s a given, but you want to know how much is reasonable. A stock going from $0.50 to $10 with 3B shares seems unlikely, but $0.50 to $0.89 may seem reasonable. So not to be literal as how cap is computed, but how it can be used to analyze stocks to see if there is room to grow and estimate by how much (ie overvalued or undervalued stocks). Jun 14 at 0:21
  • I understand the cap is no indication it will rise, I should’ve specified that it was a given the stock will rise. But given that market cap should be above a companys book value because of future growth potential, estimating market cap, and by proxy share price, would be beneficial in finding companies that may be undervalued. Jun 14 at 0:26
  • And thus, the BLUF being that analyzing a stocks market cap can help with determine a share price. Why? Because investors are not going to push price of a stock higher than viable. A company that has growth into the $3-4B range isn’t going to end up in the $25-30B range. Jun 14 at 0:31
  • "What I am talking about is if computing potential market caps is another way to use stock statistics for determining how much growth a stock could have." Since potential is just another (and more cumbersome and error prone) way of saying "share price"), why not just use share price?
    – RonJohn
    Jun 14 at 2:51
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    "But given that market cap should be above a companys book value because of future growth potential, estimating market cap, and by proxy share price, would be beneficial in finding companies that may be undervalued." That should be your question (and it's a good question).
    – RonJohn
    Jun 14 at 2:51
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"Cap" in "market cap" is short for "capitalization". The definition of "market cap" or "market capitalization" is the number of outstanding shares times the value of each share. That's it. As RonJohn says, there's no "analysis" involved. It's a trivial calculation: you multiply. It's not the "perceived worth", it's the actual, concrete worth. It's the exact dollar amount it would cost you to buy all the shares of the company (assuming that the price doesn't change).

Perhaps you're thinking that "cap" here means "limit", like, "We put a 5% cap on pay raises." If that's what you're thinking, then no, the fact that the abbreviation for "capitalization" happens to be spelled the same as a word meaning "limit" is just a coincidence. (Or maybe that's not what you're thinking at all and I just read that into your wording ...)

If a stock is trading at $10 per share and their are 1 million shares outstanding, then their market cap is $10 x 1 million = $10 million. If the share price goes up to $11 (and the number of shares remains the same) their market cap will become $11 x 1 million = $11 million. Etc. Figuring out what the market cap will be at various share prices is just a matter of multiplying.

I've never heard the term "potential market cap". Investors and analysts have all sorts of terms for all sorts of calculations they do so maybe it's a term that's out there. I suppose one could use such a phrase to mean "what the market capitalization of a company might be under such-and-such hypothetical circumstances". Like, "Right now Fwacbar Corporation has a market cap of $1 billion, but if they win this big government contract they're bidding on they're value could increase to $1.3 billion".

Any estimates of future market cap or share prices include some amount of speculation. If a company releases an innovative new product, their sales might boom as everyone rushes out to get the latest thing. Or it might be a total flop and they'll lose money. If you could come up with some formula or algorithm to determine what a company's share price will be next month, you could become a very rich man.

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  • I disagree that "market cap" (which Im aware abbreviates for capitalization) is nothing more than a simple computation. The computation for velocity or force is simple, but in context means more than a * b = c. The resulting value is from the share price the market has derived (through whatever spread of buyers and sellers). It is thereby the markets view of the value of the company; what are buyers willing to pay on a per share basis for a piece of the firm. 1/2. Jun 14 at 19:01
  • From that, understanding the amount of outstanding shares along with the company's market sector, screening stocks must take this into account. A company that has 100M shares in 1995 that hit a peak price of $10, now has 3B shares in 2021 and is trading at $0.5 without any substantial change to sector fundamentals or its own business model, has issued shares to stay afloat and will not see $10/share again. Why? Because that would mean the market valued the exact same company at $1B in 1995 and $30B today? No. Instead we use this to determine what peak we may see in today's market. 2/2. Jun 14 at 19:04
  • @pasta_sauce Look up the definition of "market cap" and it IS a simple calculation if you know the share price and the number of shares outstanding. Of course there are many complex factors that go into determining what the share price and market cap of a company are at any given time. To embrace your example, force IS a simple calculation of mass x acceleration. If you know any two of the three, you can calculate the other. Yes, of course one can say that there could be many complex factors determining the acceleration that a given object experienced. ...
    – Jay
    Jun 15 at 12:19
  • ... My point in saying that market cap is a simple calculation was that it appeared from the wording of the question that the OP didn't know or understand the definition of market cap. If a physics student asked a question about what "force" is, the correct answer would be that it is mass x acceleration. Of course there is much more that could be said about the subject.
    – Jay
    Jun 15 at 12:21
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Typically all fundamental analysis of stocks is done on a per-share basis: price per share, book value per share, earnings per share, etc. However, because the size of one share is arbitrary, ultimately the analysis comes down to ratios: price to book, price to earnings, etc.

Meanwhile, exactly the same ratios can be obtained at the whole-company level, using the market cap as the price, and using the entire company's book value, earnings, etc. So the market cap doesn't provide any fundamental information not captured in the per-share numbers.

The one case where I've seen it argued that the market cap per se is informative is for assets that have no fundamental measure of value, like cryptocurrencies. For example, some argue that Bitcoin will become the dominant currency and thus "should" ultimately have a market cap similar to the monetary instruments that exist today.

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