The stock of KE Holdings (NYSE:BEKE, 30-year Financials) is estimated to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $53.88 per share and the market cap of $63.8 billion, KE Holdings stock is estimated to be significantly overvalued. GF Value for KE Holdings is shown in the chart below.
Because KE Holdings is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 43.6% over the past three years and is estimated to grow 18.33% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. KE Holdings has a cash-to-debt ratio of 7.09, which ranks better than 84% of the companies in Real Estate industry. Based on this, GuruFocus ranks KE Holdings's financial strength as 7 out of 10, suggesting fair balance sheet. This is the debt and cash of KE Holdings over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. KE Holdings has been profitable 1 over the past 10 years. Over the past twelve months, the company had a revenue of $10.3 billion and earnings of $0.261 a share. Its operating margin is 6.13%, which ranks worse than 66% of the companies in Real Estate industry. Overall, the profitability of KE Holdings is ranked 2 out of 10, which indicates poor profitability. This is the revenue and net income of KE Holdings over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of KE Holdings is 43.6%, which ranks better than 91% of the companies in Real Estate industry. The 3-year average EBITDA growth rate is 105%, which ranks better than 97% of the companies in Real Estate industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, KE Holdings's return on invested capital is 8.67, and its cost of capital is 7.43. The historical ROIC vs WACC comparison of KE Holdings is shown below:
To conclude, the stock of KE Holdings (NYSE:BEKE, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is fair and its profitability is poor. Its growth ranks better than 97% of the companies in Real Estate industry. To learn more about KE Holdings stock, you can check out its 30-year Financials here.
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