Two of the worst performers on the S&P/ASX 200 Index (ASX: XJO) on Thursday were the Flight Centre Travel Group Ltd (ASX: FLT) share price and the Webjet Limited (ASX: WEB) share price.
The shares of the travel booking companies fell 10.5% and 10%, respectively.
Why did Flight Centre and Webjet shares crash lower?
With the market falling heavily today, it appears as though investors have been taking profit.
This isn’t entirely surprising given the stellar gains Flight Centre and Webjet shares have made over the last seven weeks.
Prior to today, the Webjet share price was up over 100% since April 22, whereas the Flight Centre share price was up 64% over the same period.
This has been driven by Australia’s quicker than expected recovery from the pandemic and optimism that the domestic travel market could rebound in the coming months. That is of course if Australia can avoid a second wave as restrictions are eased.
Therefore, news that someone in Melbourne that was protesting at the weekend has been diagnosed with COVID-19 may have also spooked investors today.
Should you buy the dip?
I wouldn’t be a buyer of Flight Centre or Webjet’s shares right now. Although both their shares are down materially from their highs, they still look very expensive to me.
This is particularly the case with Webjet. It currently has a market capitalisation of $1.4 billion. This is based on a total of ~339 million shares outstanding and a share price of $4.18.
Surprisingly, Webjet’s market capitalisation is actually greater than what it was at the start of the year before the pandemic.
At that point Webjet had a total of ~135.6 million shares outstanding and a share price of $9.49. This equates to a market capitalisation of just under $1.3 billion.
So, despite the Webjet share price trading 73% lower than its 52-week high and the next couple of years likely to be very tough, its valuation is actually higher now than in January because of its highly dilutive capital raising.
I believe this demonstrates why it can be dangerous to just use a company’s share price as a guide for whether a share is cheap or not.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The post Why the Webjet share price isn’t a bargain buy appeared first on Motley Fool Australia.
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