LWN: Comments on "Red Hat share price passes Microsoft's (The Inquirer)"

Red Hat share price passes Microsoft's (The Inquirer)

spaetz — Thu, 22 Oct 2009 11:21:46 +0000

Stupid comparison. If you plot the NASDAQ index next to RedHat you can see that it has clearly simply followed the NASDAQ. Microsoft on the other hand has pretty much remained flat. Perhaps because (finance.yahoo.com):
% of Shares Held by All Insider and 5% Owners: 13%
% of Shares Held by Institutional & Mutual Fund Owners: 62%

most of the share are actually hold be entities and people that keep them longterm?

So this is saying nothing about Redhat (simply followed the market), while the reasons about Microsoft's flatness might be realted to disappointment of investors or simply because there is less trading going on. But that would require more analysis than simply glancing at stock prices.

Accurate math

drag — Wed, 21 Oct 2009 18:05:26 +0000

Sometimes people keep individual stock prices high on purpose. Often it is to
avoid the overhead of dealing with day-traders and the desire to deal with
only serious investors.

Microsoft keeps things cheap so that they get as much attention as possible,
also I believe they do some profit sharing with it's employees and that may
be based on individual stocks.

Accurate math

tialaramex — Wed, 21 Oct 2009 10:25:22 +0000

The exchange probably has a minimum price rule. Setting the IPO per-share price too low risks being disqualified from the exchange for not obeying the rule during a subsequent dip in confidence, forcing the company to spend money on a reverse-split when it can least afford to do so.

The size of a normal trade is important because the market maker isn't obliged to complete an order that's undersize. Ordinarily, with a properly sized order, the market maker's quotes are something you can rely on, even if no-one else happens to be buying at the moment you want to sell, the market maker will be as good as their word on the bid price and take the stock off your hands. But if you're undersize, there's no obligation to do that.

Now on a heavily traded stock like RHAT or MSFT that's irrelevant. Someone is going to clean up your oddly sized offer and in the worst case you might lose a cent per share on the deal for your refusal to work in round numbers. But on more thinly traded stock its the difference between a trade now and leaving your order on the books for minutes, hours, even days until another trader wants the other side. Liquidity costs money.

Take BEOS. At or soon after IPO it was bought by lots of fairly ordinary people with little or no knowledge of trading but who loved Be's product and believed they'd do well. The company's figures, gloomy even at IPO if you bothered to look, got no better, and belts were tightened as the economy struggled. Institutional owners got out quickly, and BEOS was delisted from NASDAQ. Many of those ordinary people expected to go online, click a button and sell up their BEOS, but they had only a handful of stock and with the big investors gone there was no-one to buy from them. Lack of liquidity cost them what little was left of their investment.

Accurate math

epa — Wed, 21 Oct 2009 08:57:39 +0000

In the New York Stock Exchange usually a unit of trading is 100 shares of stock.

A foolish rule IMHO. It just gives an incentive to companies to issue a large number of shares with a low share price, so that trading them will be easy. That, in time, might prompt the NYSE to increase the trading unit to 1000 shares, and so it goes on.

Accurate math

eduperez — Wed, 21 Oct 2009 07:52:53 +0000

Normally, a split happens when the price per share has raised to a point where it is considered necessary to do the split. So, while I agree that technically they are not good nor bat, the fact that they happen is normally a symptom of good health.

Red Hat share price passes Microsoft's (The Inquirer)

sean.hunter — Wed, 21 Oct 2009 07:02:08 +0000

This is not symbolic, it's just a dumb finance story in the tech media. No more or less dumb than the dumb tech stories we all moan about it the mainstream media.

Everyone else has talked about the share price != market cap issue, I want to talk about the assertion that 2001 was a good time to invest in Red Hat. 2001 was not necessarily a "darn good time to invest in Red Hat". Lots of tech companies which went public in a blaze of glory at that time are not around any more. It's easy to pick one that is still around and look back at the astronomical return, but you are missing the very high standard deviation of returns from new issue tech stocks in general. Lots of people bought Tech stocks for a piddling $3 and saw that go to an even more piddling zero. This is survivorship bias.

Accurate math

ekj — Wed, 21 Oct 2009 07:00:33 +0000

Many stock-exchanges have a "unit of trade", and conduct regular trades in a integer count of such units, which means fees are higher if you're buying fractions of a unit.

Having a unit always be 100 shares seems counterproductive to me though, because that means that 100 shares of a penny-stock may cost $30 whereas 100 shares of an expensive stock could be $10.000 or more -- enough to bar many casual investors.

On the OSE (main norwegian exchange) the unit-of-trade is a multiple of shares worth $1000 - $2000, though the count of shares can vary.

So a unit may be 100 shares worth $15 each -- or 10 shares worth $150 each. In this scheme, splits doesn't matter; what was 10 shares worth $150 (for a $1500 unit) becomes 20 shares worth $75 (for a $1500 unit), so no difference at all.

In addition to price-changes, dividend-payments need to be taken into account, for performance-comparisons to make sense.

A share that grows 10% and pays 5% dividend is preferable to one that grows 12% but pays no dividend, afterall.

Accurate math

Kit — Tue, 20 Oct 2009 23:39:26 +0000

>Thus my rational that it is a good thing, is that
>more people can afford to buy 100 unit quantities
>at lower stock prices. And that means more buyers.

This is actually the rational (although sans the 100 quantity specifics) that companies usually first issue their stock with a low par value (or no-par): to maximize the size of the market that could afford to purchase them shares.

Meaningless comparison

rgmoore — Tue, 20 Oct 2009 21:35:01 +0000

I do often wonder why news sites quote share price all the time instead of market cap, but then these 'business news' outfits like CNBC are a fountain of stupidity in so many ways.

They're reporting it at least in part for the benefit of shareholders who want to know how much their investment is worth. It's much easier to multiply your number of shares by the per-share price than it is to figure out your fractional ownership of the company and multiply by the market cap.

Accurate math

nevets — Tue, 20 Oct 2009 21:19:26 +0000

In the New York Stock Exchange usually a unit of trading is 100 shares of stock. Some firms will buy a bunch and sell them off individually, but they usually charge an extra fee if you don't buy in 100 unit quantities. I think this is not as bad in the world of internet trading, where the companies can always find a buyer for those broken units.

My current broker only offers in 100 share units and charges a very small commission.

Accurate math

man_ls — Tue, 20 Oct 2009 21:00:47 +0000

How weird. Where do you trade? Traders I know usually charge a small % of the operation and/or a fixed commission, never a fee per stock unit. Is it different in other markets?

Accurate math

nevets — Tue, 20 Oct 2009 20:26:51 +0000

True a 1:2 split means the stock price is cut in half and everyone has twice as many shares. The reason I consider this a good thing is that, when I buy stock, it is cheaper to buy in 100 unit bundles (due to commissions). Thus, I usually avoid buying a stock at over $100 a share, because I can't afford $10,000. But I may be able to afford $5,000.

Thus my rational that it is a good thing, is that more people can afford to buy 100 unit quantities at lower stock prices. And that means more buyers.

Accurate math

man_ls — Tue, 20 Oct 2009 20:14:57 +0000

As you point out, splitting of a stock is usually a good thing, and that makes the price per share drop drastically.

In fact, a 2:1 split makes the share price go exactly to 1/2. And splits are not good nor bad, they just mean that the company wishes to double the number of shares. Some stocks have very high prices while others are very low, and the bare number says nothing about their respective quality.

Red Hat share price passes Microsoft's (The Inquirer)

deltaray — Tue, 20 Oct 2009 19:04:33 +0000

If this is truly symbolic, then the fact that Apple's share price is $200 should mean something too. Actually, today is the first time in its history that Apple's price has gone past $200. Apple is now the 4th largest US company by market capitalization.

Meaningless comparison

drag — Tue, 20 Oct 2009 19:03:31 +0000

I don't think that Microsoft's dividends amount to much. Just a few bucks per share, at most. It is $0.13 per share, per quarter.

The best quick-comparison you can do between company's stock prices, IMO, is the P/E ratio. It's Price (# of outstanding stock * price) divided by Earnings (Net Income). This gives a idea on how the expectations of the stock owners weigh against how much money the corporation actually makes.

This can be a good or bad thing, which is only useful with more back story information on the particular company. A high P/E could mean that the company is overpriced because it is hyped and in a bubble or it could mean that people just have very high expectations for the company... A low P/E could be a indicator that this is a great investment because it is a company that people overlook, or it could mean that it is a failing business and people are not going to touch it with a ten foot pole.

P/E ratio:
MSFT = 16.18 years
RHT = 61.71
IBM = 12.56
EBAY = 20.86
AAPL = 34.78

Generally speaking your looking for something under 10 years, I think. Seeing how most people are investing in the stock market in about 10 year increments then that makes sense in a sort of odd way.

Redhat, I think, is still cruising at a high stock price since it's Dot-Com bubble days... if you look at it it went crazy for a short time, but unlike most of those companies from that era it actually has been able to maintain some consistent growth rate and thus have not really given people justification for dumping it's stock.

Meaningless comparison

leomilano — Tue, 20 Oct 2009 18:33:50 +0000

To be specific, the ratio of market caps is now around 45. To be clear, MS is about 45 times the size of Red Hat. Assuming RedHat's market cap gets 6 times larger in the next 10 years, and MS stays the same, in 10 years MS will be 7 to 8 times larger than RedHat. Of course this is just to quantify things a bit.

On the other hand, Cloud computing, Google stepping in, Android, Apple back in the game, there are many reasons that could make MS's market cap actually go down! (who needs to spend lots of money in software licenses for home use when most everything you use is in the cloud??)

Meaningless comparison

NAR — Tue, 20 Oct 2009 18:19:47 +0000

I think the dividends payed through this period should be also factored in this calculation...

Meaningless comparison

nevets — Tue, 20 Oct 2009 18:00:39 +0000

I would then say the article is FUD, but this chart makes it look not that bad.

Note, the google link keeps changing the start date. If you put in 10-20-2001 to 10-20-2009 it shows RHT with a 600% increase.

Meaningless comparison

kripkenstein — Tue, 20 Oct 2009 18:00:24 +0000

Of course it's meaningless, but it is kind of symbolic, and it does represent the fact that Microsoft's stock has not done well, while Red Hat's has, for many years now, which does reflect something on the two companies.

Meaningless comparison

gst — Tue, 20 Oct 2009 17:49:27 +0000

They had a 2:1 split on Feb 18, 2003 according to http://www.google.com/finance?q=microsoft

Meaningless comparison

nevets — Tue, 20 Oct 2009 17:45:54 +0000

But as you mentioned about stock splitting, if Microsoft had its stock shares split in that time frame, this is all FUD. As you point out, splitting of a stock is usually a good thing, and that makes the price per share drop drastically.

I don't know if Microsoft split shares in that time frame, and I'm not about to go investigate if it did.

Meaningless comparison

nevets — Tue, 20 Oct 2009 17:41:31 +0000

It does start out saying:

True, Microsoft has a hell of a lot more shares out there in the marketplace

It seems more symbolic than anything else. What I find more important in that article, is that Red Hat has increased by 600% since 2001 where as Microsoft has gone down in that same time frame. That shows the trends of things much more than the actual stock price.

Meaningless comparison

epa — Tue, 20 Oct 2009 16:53:43 +0000

Share price means nothing at all until you multiply it by the number of shares outstanding. If Red Hat continues being successful they might have a stock split (remember those from the dotcom days?) and then their share price would crash down again. Market capitalization is a meaningful measure, share price by itself is not, because not every company is divided into the same number of shares.

(I do often wonder why news sites quote share price all the time instead of market cap, but then these 'business news' outfits like CNBC are a fountain of stupidity in so many ways.)