Could the Aston Martin (LSE: AML) share price possibly grow 2,000%?
That number may sound like pie in the sky – but it would simply take the share back to where it stood five years ago, before it lost 95% of its value.
Might that happen?
Investing arithmetic can seem counterintuitive
First, you may be wondering about the maths.
After all, if a share falls 95%, why does it need to climb 2,000% to recover that loss and not just 95%?
The answer is that the current share price is so much smaller than it was before it collapsed.
Think of it this way: over five years, the Aston Martin share price has fallen to one twentieth of what it was. So it needs to increase 20 times simply to get back there.
If it did so, that could be a huge gain for someone buying at today’s price.
Great potential, but an alarming reality
But I will not be buying today – or any time soon.
The thing is, that 95% decline in the share price reflects a huge deterioration in the attractiveness of the Aston Martin business.
It still has massive potential – as it did five years ago.
Now as then, the investment case benefits from a storied history, legendary brand, iconic car designs and well-heeled customer base of rich, loyal petrolheads.
But the past few years have shown that, even though it has great assets to work with, the company lacks a business model that has proven it can consistently break even, let alone turn a profit.
Three key things that need to change
For the Aston Martin share price to start moving strongly in the right direction, I think that needs to happen.
Maybe the firm will not break even any time soon, but it at least needs to convince investors it is on a credible path to doing so.
A second key point is the company’s balance sheet, specifically its net debt of £1.4bn. Just servicing that is very expensive: last year the net cash interest cost was £143m.
Starting to make a serious dent in reducing the debt could help boost investor confidence. That may be less true if it involves selling new shares and diluting existing shareholders, like the company has done many times in recent years.
Thirdly, I think Aston Martin needs a stronger plan for growth. That might be in terms of higher sales volumes (wholesale volumes fell 10% last year).
But it could also be revenue growth, maybe from higher selling prices as revenues fell 21% last year. The best thing would be improved profitability. With a loss before tax of £364m last year, any profit seems a long way off.
Could the share price move upwards?
The right progress on those factors could help turn around the Aston Martin share price.
To rise 2,000%, though, I think the model would need to be proven, the company must move from a net debt to net cash position (or close to it) and the profitability picture needs to be transformed.
Twenty times today’s share price would mean a market capitalisation around £8bn. Justifying that, even on a racy price-to-earnings ratio, would mean annual profits of hundreds of millions of pounds.
That is not impossible. But I see no realistic expectation of it any time soon.
