Jim Cramer Explains Why SanDisk (SNDK) Makes MongoDB (MDB) Look Expensive

Jim Cramer, on his September 2 segment of Mad Money, highlighted a common investor mistake when comparing stocks. He used two tech companies, hardware giant Sandisk Corporation (SNDK) and enterprise software leader MongoDB, Inc. (MDB) to illustrate his point. Many people, including his late mother, would consider Sandisk more expensive at $1,553 than MongoDB at $375 due to their absolute prices. However, this comparison is misleading as it ignores key factors like shares outstanding and earnings per share.

To truly evaluate the cost of a stock, Cramer recommended looking at the price-to-earnings (PE) multiple, calculated by dividing the stock price by the estimated earnings. He divided Sandisk's price by its earnings estimate of $212 to get a PE multiple of approximately 7.3, which is considered a steal compared to the S&P's average of 21 times earnings. MongoDB, on the other hand, had a PE multiple of nearly 58, indicating it was significantly more expensive.

Cramer stressed that while MongoDB is a solid company, its high valuation after a decent quarter led to a 13.5% drop. He emphasized that investors should avoid making decisions based solely on a stock's price and instead focus on the company's earnings potential. Sandisk's lower PE multiple makes it appear more attractive, but hardware stocks often face cyclical risks. MongoDB's high valuation leaves little room for error, and even a good earnings report may not be enough to prevent significant price corrections.