Why is stock price!=exit price +eps every year. Shouldn’t they at least be in the same range if not equal? Does that mean a stock is overpriced? Edit: I understand it has earnings potential accounted for and that the price is set by people. Why is there a difference and the factor is so much? For example nvidia PB IS close to 20 which makes book value $13. Their eps in th last four quarters have been 1.27 1.7 2.16 and 2. At this rate if one buys even assuming current growth, isn’t this inflated?
Book value is the actual $ value of all assets minus liabilities of a company. Market value is almost never equal to book value. It has market's expectation of earning potential baked in.
Price is based on what they expect someone to pay for it in the future. Almost everyone goal in purchasing stock is to sell it for more later. So today's price is based on what they think someone will pay for it tomorrow. That's why growth and future earnings are much more important than today's earnings.
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Equity pricing is a huge area of finance. The short answer is things like P/E and P/B are shorthands that work in certain scenarios, but the equity value of a firm is really the discounted value of expected future free cash flows. However, those are not always so easy to ascertain and the market reflects different opinions among buyers and sellers. Book value is only meaningful for certain types of businesses. And GAAP earnings per share are not the same as free cash flow per share - you can Google it to understand the difference.
Price is what the market set, it's never rational. Queue someone from amazon.
Right but if the company is only worth so much why would rational people pay such inflated prices? Are you still saying the company share is just worth exit price + all eps?
Because the stock price is actually a negotiated price of sorts between buyer and seller. The buyer is willing to pay above book value because they think they will generate a positive return on their investment.