Why Is Google Stock So Expensive?

Alphabet Inc (NASDAQ:GOOGL) is the parent company for Google, YouTube, Android, Waymo, DeepMind, Verily, and more. The tech conglomerate is one of the largest in the world, worth well over $1 trillion. That makes co-founders Larry Page and Sergey Brin among the richest and most powerful men in the world.

So, why is Google stock so expensive?

The company’s stock price at the start of 2021 hovered around $1,800.00 per share. It nearly doubled in price from its 2020 stock market crash lows, despite being the center of no less than three antitrust cases that will define it as a company in the 20s.

Its $2.1 billion Fitbit Inc (NYSE:FIT) acquisition only adds fuel to the concerns from data advocacy groups and regulators.

Google and its parent company Alphabet are one of the biggest technology powerhouses in the world. Around 90 percent of all internet search traffic runs through Google’s platforms. It’s the largest online advertising platform, and it expanded further into our homes and lives in the 2010s.

But why does it cost so much to buy a single share of Alphabet stock and how much bigger it can really get?

What Does An Expensive Stock Mean?

There are various ways to define what expensive means; there’s the share price and then there’s valuation.

Share price is commonly used by beginning investors to determine whether a stock is cheap or expensive, while valuation is what sophisticated investors focus upon.

All companies are not created alike, and Google is one of the original tech companies formed during the infamous dotcom bubble era. Amazon (AMZN) too, and both are trillion-dollar juggernauts today, proving the value of seamless online content.

Higher valuations dominated the dotcom bubble at the turn of the millennium, and it’s why Warren Buffett was so late to the table buying Apple (AAPL) and Amazon (AMZN) shares.

Older generations are used to seeing more conservative valuations and P/E ratios when investing in legacy 20th century companies. Buffett’s Berkshire Hathaway (BRK.B) holding company trades for just over 15 times its earnings, whereas Tesla (TSLA) has traded well over 1,500 times earnings.

In fact, individual Berkshire shares cost around $350,000. That means you could buy a house in some parts of the country if you owned just one share.

The high prices per share of companies like Google and Berkshire don’t necessarily make them expensive in valuation terms, only in price terms.

It’s also why the fractional trading has become so popular: it’s a sensible way for an average investor to own a piece of either.

Is Google Stock Expensive?

Alphabet Inc’s Class A shares traded for around $1,800.00 at the start of 2021. It fell to a 52-week low of $1,008.87 during the coronavirus crash before quickly increasing in value toward year end. That gave it a market capitalization over $1.2 trillion at the end of 2020.

Most of Google’s ad revenue comes from advertising – it has a dominant market share in online search (Google), mobile OS (Android), and online video (YouTube), just to name a few.

It struggled somewhat as did other ad companies, like Facebook (FB). It reported its first ever year-over-year revenue decline in the second quarter. It did bounce back by the third quarter though and kept its growth pattern.

The company’s shares trade for around 35x earnings. And it went through a major corporate restructuring to make Google a subsidiary of Alphabet in 2015. This ensures YouTube and Google, for example, remain separate companies.

However, that relationship is more symbiotic than you would think. YouTube’s content creators generate revenue through its Partner Program, which pays through Google AdSense. In fact, the company is under a microscope to determine if it needs to be split, along with Facebook (FB) and Amazon (AMZN).

Even Epic’s non-related class-action against Apple could signal problems for Google’s Play Store down the line. Google’s next stock split may come from forced regulatory action, but it’s not unprecedented in American history.

Will Google Stock Split?

Google is unlikely to split on its own although the only split so far came from its 1998 for 1000 split in 2014. 

To understand why Google stock won’t split anytime soon, we need to revisit a meeting the founders had with Warren Buffett in the past.

Famously, Buffett has declared that his own company, Berkshire Hathaway, will never undergo a stock split, but why?

His philosophy is that to attract long-term investors, he wants shares that appreciate in value over time with some level of stability, and that low-priced shares invite more “trading” in the issued shares.

Buffett wants his shareholders to view themselves as partners in his company, not traders of the shares of his company.

He shared his philosophy with the Google founders and thereafter they never split the stock again, which suggests they are unlikely to in the future and have fully adopted Buffett’s viewpoint.

 

Is Google Stock A Good Investment?

Google trades at a P/E ratio that is in line with rivals Microsoft (MSFT) and Apple (AAPL). In fact, it’s cheaper than Apple and all of these companies trade for a discount compared to Amazon.com.

For years, Google has been growing at a fast clip. Revenues and profits continue to rise at double digit rates. If past history is any predictor of the future, Google remains a good investment.

The big risk to the company is regulatory intervention now.

Why Is Google Stock So Expensive? The Bottom Line

Google is a trillion-dollar company and one of the largest in the world in any industry. This technology giant built a fortune through online advertising, and it owns many of the most popular channels to do so. That means it’s joining Facebook in the firing squad from antitrust regulators.

So far, it’s finding opposition in both Europe and Australia. Rising tensions against the U.S. in the international community could put Google in hot water in even more places.

Still, investors with a high appetite for risk may appreciate owning shares in all the fragmented Baby Bets that break off from Pa Alphabet.

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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.