I present my case for Google purely on their P/E ratio and future earnings. Over the last couple years Google has been trading at very high P/E levels justified by high earnings growth. Overtime the P/E ratio has dropped significantly from over 100 down to 47, as you can see from the chart below.
With a quick comparison you can see that the current P/E ratio makes Google an attractive buy. For comparison I picked Yahoo (YHOO) as a direct competitor and EBay (EBAY) as a strong internet name. Yahoo trades with a P/E ratio of 61 with negative year over year earnings growth. The new Panama ad serving system will help Yahoo’s earnings but they are still trailing Google in search traffic. According to Alexa, Yahoo is the number one visited website with Google and MSN closely trailing at 3rd and 2nd respectively. EBay trades with P/E ratio of 43 and earnings growth estimated at 20% in 2007. According to Alexa, EBay comes in 16th in overall internet traffic. Compared to these two internet companies Google seems to be fairly priced with some possible room to grow.
Looking at the P/E chart of Google below, it appears that the P/E ratio has found a bottom. If the P/E ratio stays at current levels then the stock price should see some nice acceleration through 2007 from earnings growth. As Google continues to dominate the internet I wouldn’t be surprised to see the P/E ratio increase, creating an even higher stock price.
I understand that the P/E ratio and Earnings don’t tell the whole story, but Google is still a growing company and has a strong presence on the internet. I think they will continue to grow and become more popular around the world.
Disclosure: I purchased some Google last week.