Google Is Not Expensive

| About: Alphabet Inc. (GOOG)

Google's big run up to its current astronomical price sure makes it seem expensive. However, the fundamental data for Google (NASDAQ:GOOG) indicate the stock is not excessively valued, at least in how I read the numbers.

After I authored my most recent report on Google Glass, a comment came in which read, "…nothing goes straight up like this," though the commenter favored Google long-term just the same. It's not true though, sometimes, when new light is shed on a company and previously hidden value or potential value is exposed, and when investor interest is intensified, a stock price and valuation can each adjust quickly to reflect that information in the efficient market.

Also, the fact that a stock has recently run on a hot streak should bear little weight in the equation about its future value, if one subscribes to random walk theory. Each movement of a stock is independent of the previous movement, and rather dependent upon the company's operating execution and other factors impacting demand for its shares. Obviously, there is some value in technical analysis for the purposes of short-term trading. Over the longer term, though, the fundamentals will determine where a stock treads.

In the case of Google, I suggest ignoring past price history and focusing instead on fundamental analysis. Though, as a Senior Equity Analyst, I often included past stock performance in my screens for successful companies that were also valued at a reasonable price for their earnings growth. That is because I believe past stock performance can serve as evidence of a company's ability to create value through its operating execution. This message comes through most clearly with lightly followed companies that have less noise to disturb and distract valuation.

Google's P/E ratio on its trailing twelve months' EPS is 25.8X. That might seem relatively high in comparison to the 18.1X P/E of the S&P 500 Index or the 17.1X P/E of the Nasdaq 100. However, Google deserves a premium to the market for a couple reasons. First, historically GOOG has exaggerated market performance, as is evidenced by its beta coefficient of 1.2. Given the trajectory of the market today and my expectation for the upward momentum to carry on, you would want to own stocks with a +1.0 beta to best capture that wind in your sails. Stocks seem clear to me to be set for further gains on the further fuel provided by the Employment Situation Report, despite my view about its inaccuracy.

A second reason Google deserves a premium P/E to the market is because Google is expected to grow at a faster pace than the market. Analysts see Google's five-year earnings per share growth at 13.6%, and growth over the next two years at 15.9%, based on Yahoo Finance data. The stock is priced at 18.3X the consensus estimate for 2013. These figures determine the P/E-to-growth ratio of 1.3 based on its five-year growth outlook and 1.15 based on the two-year forecast. We know the market's historical growth rate should be in the low double-digits, or it at least had been up until the last lost decade. At the end of last year, analysts saw the S&P growing earnings at an 11% rate in 2013, but those estimates have been falling. If the market might grow 10% a year on average over the next five years, then Google's growth premium would be 36% or more. Google's current P/E premium to the S&P 500 is about 42%, which is roughly in line with its growth premium. So on an intrinsic P/E-to-growth comparison and a relative PEG comparison to the market, Google is not so expensive at all. It just seems that way. I continue to favor the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.