Google Stock Jumped 65% in 2021: Is Google Overvalued?
In 2021, S&P 500 set 70 record highs with approximately 27% overall growth. Alphabet, the parent company of Google, was one of them which hit the record high. Alphabet stock (GOOGL) surged 65% in 2021, hitting the all-time closing high of 2996.77 on 18th November, 2021. As the price of GOOGL gets higher and higher, people may wonder: “Is Google overvalued?”
Just like any other consumer goods, stocks can be too expensive for its value. If a consumer finds the price of an item unreasonably high, they may not choose to buy that item. Similarly, if the price of a stock is seemingly too high, it is worth assessing—no one invests to lose money.
But before considering Google, let’s first be clear on how to determine if a stock is overvalued.
What Does an Overvalued Stock Mean?
Investopedia defines an overvalued stock as follows:
An overvalued stock has a current price that is not justified by its earnings outlook, typically assessed by its P/E ratio.
The P/E ratio stands for “Price-to-Earnings Ratio” and it relates a company’s share price to its earnings per share. To calculate the P/E ratio, simply divide the current stock price of a company by its earning per share:
Investors and analysts commonly use this P/E ratio to assess relative valuation of stocks. The higher the P/E ratio, the more overvalued the company may be. Otherwise, investors are expecting high growth from the company. Typically, investors and analysts determine if a company is overvalued or not in comparison with other companies in the same sector or peer group.
Investors and analysts may consider a company overvalued at a P/E ratio of 50 and undervalued at at a P/E ratio of 10. While investors may avoid overpaying for such stocks, overvalued stocks can be used strategically by short sellers.
The P/E Ratio of Alphabet (from March 2016 to February 2022)
Now, let us review historical P/E ratios of Alphabet along with those of other companies in the same sector, as suggested above. For their similarity, so-called GAFAM are in consideration. The table below displays the P/E ratios of GAFAM for the past five years, i.e., from March 2016 to February 2022.
P/E Ratio of GAFAM
Date | Apple | Microsoft | Meta | Amazon | |
---|---|---|---|---|---|
2/18/2022 | 23.24 | 27.7 | 30.66 | 14.94 | 47.11 |
12/31/2021 | 25.81 | 29.36 | 35.74 | 24.37 | 51.47 |
9/30/2021 | 25.75 | 25.11 | 31.41 | 24.22 | 64.26 |
6/30/2021 | 26.47 | 26.69 | 33.46 | 25.76 | 59.96 |
3/31/2021 | 27.46 | 27.26 | 31.86 | 25.2 | 58.88 |
12/31/2020 | 29.86 | 35.67 | 32.8 | 27.05 | 77.97 |
9/30/2020 | 28.32 | 35.2 | 33.54 | 29.83 | 92.2 |
6/30/2020 | 31.19 | 27.44 | 34.85 | 27.73 | 106.07 |
3/31/2020 | 23.45 | 19.67 | 25.81 | 22.85 | 93.15 |
12/31/2019 | 27.23 | 22.83 | 26.9 | 31.87 | 80.31 |
9/30/2019 | 26.2 | 18.54 | 25.55 | 28.45 | 76.88 |
6/30/2019 | 21.86 | 16.49 | 25.79 | 32.71 | 78.57 |
3/31/2019 | 29.52 | 15.55 | 25.49 | 24.77 | 74.35 |
12/31/2018 | 23.91 | 12.58 | 22.82 | 17.32 | 74.61 |
9/30/2018 | 45.41 | 18.37 | 45.75 | 24.81 | 112.28 |
6/30/2018 | 48.9 | 16.16 | 44.88 | 30.08 | 134.8 |
3/31/2018 | 44.02 | 15.53 | 48.48 | 26.46 | 182.28 |
12/31/2017 | 58.65 | 16.61 | 55.76 | 32.74 | 190.16 |
9/30/2017 | 32.6 | 15.94 | 23.99 | 33.11 | 244 |
6/30/2017 | 33.75 | 15.51 | 24.05 | 34.39 | 245.69 |
3/31/2017 | 28.7 | 15.86 | 27.3 | 37.58 | 166.64 |
12/31/2016 | 28.47 | 13.04 | 27.29 | 35.29 | 152.72 |
9/30/2016 | 29.42 | 12.78 | 25.61 | 49.53 | 191.6 |
6/30/2016 | 27.26 | 10.39 | 22.94 | 54.94 | 178.01 |
3/31/2016 | 32.14 | 11.21 | 40 | 70.43 | 244.3 |
Average from Mar 2016 to Feb 2022 | 31.2 | 20.1 | 32.1 | 31.5 | 123.1 |
The five-year average P/E ratio of Google was 31.2. This figure is no different from that of the others, except for Amazon’s. (Reasons for Amazon’s high P/E ratio can be: its massive investment in R&D that increases its expenditure and lowers its earnings; hopeful attitude of investors who are willing to pay for faster-growing businesses.)
So, time to answer the question—”Is Google overvalued?” If simply compared with its peer group, it is fair to say that Google is not necessarily overvalued. But before drawing any conclusion, let us further analyze Google stock.
Steady Growth Adds Value to Google
The highest P/E ratio of Alphabet was 58.65 during these five years, recorded on 31st December 2017. In fact, the company recorded P/E ratios much higher than the five-year average between the end of 2017 and September the following year. Despite the higher P/E ratios, the company’s revenue kept growing at a steady rate for the past five years.
Especially, the company’s gain in the recent year was remarkable; its revenue rose about 40% in 2021 compared to 2020. As a result, Alphabet is now the third biggest S&P company as of 2022.
Contributors to this steady growth include its active engagement in digital advertisement and massive investment in the latest technologies such as artificial intelligence, cloud computing, and consumer hardware. The COVID-19 pandemic also pushed Google’s growth as use of e-commerce grew.
Investors and analysts are largely optimistic about Google’s future growth for these elements. Although price forecast ranges vary, analysts expect Google stock price will sit around 3,000 – 3,500 in 2022. For example, CNN Business gave a high estimate of 3,900 with a low estimate of 2,930. Wallet Investor predicted it will rise to 3,271.65. Market Beat set the high price target at 3,925.00 with a low at 2,525.00. On the other hand, Coin Price Forecast said it will hit 3,000 by the end of 2023.
Summing up: Google Is Not Particularly Overvalued
As of February 2022, Google’s stock price is standing between 2,500 and 2,900. Not only a company’s growth and business strategy, but also many factors such as the ongoing Russian-Ukraine tensions can affect stock prices. In fact, stock prices plunged soon after the breaking news of escalated crisis between Russia and Ukraine on 25th February 2022.
Similarly, Google stock prices can wave during the year ahead. However, as we have seen above, the company has had fair P/E ratios for recent years. Additionally, Alphabet’s businesses have been growing steadily with multiple layers added in recent years. For these factors, it is fair to say that Google is not particularly overvalued.