I’m often asked my opinion of Google’s (GOOG) stock so I wanted to share some thoughts with you.
Generally, I prefer to steer clear of highly popular stocks. The research is very clear that stocks with high betas are not strong performers. Also, with so many eyes following Google, I’d have a very hard time gaining an edge over the market. That’s why I like to hunt for bargains where other folks don’t go.
I have to give Google credit; their earnings have grown very impressively. Earnings are currently growing about 20% to 25% which is hard to match anywhere.
The problem I have is that I don’t know how to properly value a company whose earnings are growing so rapidly. With 20/20 hindsight, we can say that Google was a great buy at its IPO. The shares then ran up to $700 by late 2007. The peak close came at $741.79 on November 6, 2007.
Since then, Google has basically been a market performer — and the market has been a poor performer. Given its volatility, I’d say that owning Google hasn’t been worth the trouble over the last three years.
What Google has done is pretty interesting since the stock went from a very high valuation to a more reasonable one (though still high), while the stock has generally kept pace with the market. The E of the P/E Ratio has grown by enough to offset the overall decline in Google’s P/E Ratio.
Below is a look at Google’s stock in blue (left scale) and its earnings-per-share in gold (right scale). The red is Wall Street’s projection. I’ve scaled the two lines at a ratio of 20 to 1 so whenever the lines cross, the P/E Ratio is exactly 20.
A few things to note: Notice how much higher the stock was compared with its earnings in early 2008. The P/E Ratio was over 40.
See the slight slowing of Google’s earnings growth in 2009? The recession barely hit them but it is noticeable.
Finally, you can really see how modest Wall Street’s earnings projection is compared with the recent trend. Just by mentally extending the gold line, I can see earnings hitting $35 per share this year. My current estimate is for $35.61 per share.
The stock’s P/E Ratio has averaged 21 over the past few years. Given my earnings estimate, that translates to a price one year from now of $747.81 per share. Given the current price, Google is a good value.
Posted by Eddy on January 24th, 2011 at 1:26 pm
Named by CNN/Money as the best buy-and-hold blogger, Eddy Elfenbein is the editor of Crossing Wall Street. His free Buy List has beaten the S&P 500 for the last four years in a row. (more)
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