Is Google Stock Overvalued?

Is Google Stock Overvalued? When Google held its IPO in August 2004, it was hands-down the number one search engine in the world. That alone made the company exceptionally valuable.

In addition to commanding the highest rates from advertisers, Google had data – lots of data – on consumer behavior. Google owned detailed information on users’ search habits, which illustrated who was searching what, when, and from where. That’s a goldmine for everyone from researchers and politicians to marketers and business leaders.

By 2015, the brains behind Google saw that the company was expanding beyond its search engine roots. With a team that included some of the most brilliant minds in the tech industry, Google had opportunities to innovate in a number of fields, from healthcare and disease prevention to urban innovation.

Rather than trying to lump all of these projects under the original search-engine-focused Google heading, business leaders launched Alphabet.

Today, Google is one of several Alphabet subsidiaries, though Alphabet still trades under its original GOOG symbol. 

Aside from the March 27, 2020, drop that impacted just about every business when the stock market crashed, Google’s share prices have consistently increased.

As of early October, the 52-week low was $1,008, and the 52-week high was a stunning $1,726. With pricing like that, it’s not surprising that some investors and analysts are wary.

Are shares trading at a price that is reasonable relative to the company’s current and future prospects, or is Google stock overvalued? 

Why Google Stock Went Up

Tech stocks have generally been big winners in the 2020 market, and by some measures, their collective success has prevented negative returns for the larger market.

The combined value of Facebook (FB), Apple (APPL), Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOGL), collectively referred to as FAAMG stocks, makes up roughly 25 percent of the S&P 500’s market cap.

With the FAAMG stocks, the S&P has grown by approximately 2 percent in 2020. Without these five, estimates indicate the total value of the S&P 500 would have dropped by 6 percent. 

The increase in value Google shareholders have enjoyed over the past year is attributed to two primary factors. First, Google is holding its own in the cloud computing space, which is an area of massive growth in the tech industry.

Businesses across the country and around the world are transitioning to cloud-based computing, and Google is well-established as one of the top three providers for these services. 

Second, between cloud computing, the Google search engine, and other lucrative brands like YouTube, the company was well-positioned to benefit from the impact of COVID-19.

Stay-at-home and shelter-in-place orders have more employees working remotely, and outside of work hours, there are more consumers looking online for socially-distanced entertainment.

That means many of Alphabet’s businesses are seeing an uptick in average monthly users, which translates into increased interest from advertisers. 

From a longer-term perspective, Google stock has been on an upward trajectory, because Alphabet as a whole is steadily increasing its revenue.

From 2016 to 2019, annual revenues grew $71 billion, moving from $90.3 billion to $161.9 billion in just three years. Given growth prospects show no sign of slowing, investors are glad to pay top dollar for these shares.

Are Google Financials Finally Slowing Down?

From 2018 to 2019, Alphabet grew its revenue by 18 percent. Though the company was well-positioned to continue growth through the economic challenges of the pandemic, there was a decline in advertising revenue.

Struggling businesses simply weren’t spending money on marketing as generously as they were pre-pandemic. In the first half of 2020, revenues increased by 6 percent, which was lower than expected. 

This decline in ad revenue impacted Google’s profitability, and therefore the profitability of Alphabet as a whole. From 2018 to 2019, Alphabet’s net income increased 12 percent, but it went down by 17 percent year-over-year for the first half of 2020.

For now, analysts are projecting a net increase in revenue for the year, but perhaps the increase will reach just 7 percent. Earnings are expected to decrease by 10 percent total for the year. 

Is Google Valuation Too High?

It’s easy to see why some investors might hesitate to buy Google stock at its current price, given the company’s outlook for 2020. However, most agree that the 2020 dip in earnings is just a pandemic-driven obstacle in an otherwise rosy future.

For 2021, the consensus is that Alphabet’s total revenue will continue to rise, reaching around 21 percent year-over-year. Earnings are also expected to pick back up, increasing by approximately 28 percent between 2020 and 2021. 

With those figures in mind, most agree that Google’s valuation is about where it should be. Certainly, share prices are on the expensive side, trading at 25 times forward earnings, but that isn’t unreasonable given trends for Alphabet in particular and the tech industry as a whole. 

Will Google Stock Drop?

Collectively, tech stocks dropped in early September, as many investors became concerned that share prices were a bit inflated. That particular drop is widely thought to be temporary. However, Google faces certain challenges that its peers do not, and these challenges may lead to a future drop. 

Google has been the subject of intense scrutiny by a number of government agencies concerned with violations of antitrust laws.

The European Union fined the company $1.7 billion in March 2019 for what it terms “abusive practices” in its process of brokering online advertisements for other websites, including blogs and newspapers. That was the third in a series of fines for various antitrust violations. 

The three fines totalled $9.3 billion, and there is no guarantee that the most recent will be the last. Several nations, including France, Britain, Australia, and Germany are weighing new antitrust proposals geared at reigning in big tech. 

Perhaps most concerning is probes by the United States government over possible antitrust violations by Alphabet. Charges have not yet been filed, and if/when they are, a case would take years to resolve. However, the eventual outcome could be a mandated restructuring of the business, which would have a substantial impact on the larger company from a financial perspective.

These regulatory issues have the potential to impact Google stock prices, and not in a good way. Any or all of these may cause Google stock to drop. However, does that mean that Google is overvalued today? Maybe not. 

Is Google Stock Overvalued? The Bottom Line

The bottom line is that Google stock, while costly, is not especially overvalued. Its price might not accurately reflect current market conditions, but it is indicative of expectations for the company’s future growth in revenue and earnings.

Google and the larger Alphabet family of businesses have the right tools and resources to drive technological advances, and shareholders who buy now are likely to grow the total value of their investment if they stick around for the ride.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.