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Google Inc. (NASDAQ: GOOG), Google Inc. (NASDAQ: GOOGL)-Is Google Underrated?

 


As a value investor, you need to determine whether the market price of a stock is overvalued, undervalued, or fairly valued. One way to do this is to weigh the stock valuation ratio. In this example, we will look at Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL) through a multiple approach to stock valuation.

First, you’ll want to find out how the current stock price compares to past benchmarks. Historical benchmarks provide a way to measure whether stock valuations differ from regular trading. It is within these differences that we look for potential opportunities.

Use historical multiples of GOOG P / E and P / S to derive implicit values.

Google Historical Multiple

Source: Market Chameleon

Compare past multiples with current multiples

From the table above, you can easily compare GOOG’s three-year historical average price-earnings ratio with the current price-earnings ratio (35.4 vs. 35.3, respectively). Similarly, compare the current P / Sales ratio with the historical average for three years (8.3 vs. 6.2 respectively). Therefore, the current P / E is in agreement with the historical average, and the current P / S is above the historical average. Keep this in mind for later use.

Compare GOOG with the market

I would also like to compare Google’s current and past multiples with other markets.

From the above data, we can see that GOOG P / E trades on average at a premium of 27% against SPY (S & P 500 ETF) P / E. However, it is currently trading at a -5% discount. Based on past benchmarks, this shows that GOOG is currently in an attractive rating. However, the P / Sales ratio increased to a premium of + 186% relative to SPY, with an average premium of + 144%. In such scenarios, it is important to take into account different multiples. Therefore, use these various ratios to come up with an implicit stock price value and compare it to the current market price.

You can calculate the implicit value of GOOG by averaging using historical benchmarks. That’s $ 2039.44 (in the range of $ 1541.43 to $ 2781.15).

This happens to be close to the current price, indicating that GOOG is now quite priced.

Source: marketchameleon.com

I don’t want to stop at an implicit value. In addition to comparing market prices with implicit valuations, I would like to consider revenue and the company’s ability to grow revenue. Is GOOG justified in trading at higher or lower valuations?

The following table shows that GOOG’s revenue and revenue grew by double digits (on average) on a one-year, three-year, and five-year basis. In addition, Google maintains a healthy gross margin of over 50%.

Google Revenue and Revenue Growth and Gross Profit

Source: Market Chameleon

Let’s compare this with other markets through SPY (benchmark).

SPY Revenue and Revenue Growth

Source: Market Chameleon

SPY’s total revenue and net income declined last year, with a compound annual growth rate in the low single digits over five years. Google is clearly growing much better.

Let’s take a look at the P / E and gross profit of SPY and past indicators.

Spy multiples and margins

Source: Market Chameleon

You can see that SPY’s price-earnings ratio has increased from a three-year average of 27.92 to 35.97 (22% increase), and Google’s price-earnings ratio is close to the three-year average (as mentioned above). If Google had the same P / E extension, the P / E would be about 43. That P / E means the price should be close to $ 2,494. What makes Google even more attractive is that not only was it able to grow revenue faster, but it also looked much better at gross profit of 53.5% vs. SPY 31.6%.

Value opportunity

In conclusion, GOOG seems to be fairly valued when using multiples of the past. However, a comparative analysis with other markets (taking into account growth and profit margins) puts GOOG at the top, providing an attractive relative value opportunity.

© 2021 Benginga.com. Benzinga does not provide investment advice. all rights reserved.

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