Is Google’s P/E Ratio Too High Or Too Low?

by Trefis Team
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Trefis explores whether Google’s P/E Ratio Makes Sense in a detailed interactive dashboard, and finds that the Internet giant’s current P/E Ratio might present an opportunity compared to the S&P 500. If Google can beat its own expectations of 17% growth, it is likely that Google’s stock will gain, especially versus the S&P 500. Google’s margins have been consistently higher than the S&P, and we discuss more below.

Also, Google’s P/E Ratio looks reasonable compared to Amazon, considering Google’s relatively consistent Revenue Growth and its thicker Net Income Margins.

Note:

FY for Google and Amazon ends December, Apple in September, and Microsoft in June.

The P/E ratio shown here for each company is a forward P/E figure calculated by taking:

the average stock price for the last quarter of the company’s reported fiscal year, and
the actual or estimated EPS for the next fiscal year

Google’s P/E ratio at 23.7x, is slightly below the 25.7x multiple it saw in 2015

  • This was likely driven by slower revenue growth the past 2 years and lower margins.
  • Google’s visibly lower Margins in 2017 were due to one-time charges related to the implementation of the U.S. Tax Act. This also impacted the company’s Forward P/E Ratio for 2016.

Google vs. S&P 500: Higher 2020 Revenue Growth For Google Could Present Opportunity

  • Google’s P/E has been slightly higher than the S&P 500, with the metric standing at 23.7x in 2019 versus 20.9x for the S&P.
  • However, Google’s 2x higher margins versus the S&P 500 (20% versus 9.4% in 2019) and significantly higher Revenue Growth rates (19% versus 6%) lend support to a higher multiple.
  • We expect Google’s Revenue growth to decline to 17.7% in 2020, compared to the S&P which could see growth increase to 7.4%.
  • We expect Google’s Net Margins to remain almost flat at about 20% in 2020, while the S&P’s margins could see a 20 bps increase to 9.6%.

Google vs. Apple

  • Compared to Apple , Google’s P/E Ratio is higher (24x versus 16x)
  • This is expected given that Google’s Revenue Growth has been consistently higher (19% versus -2% in 2019) and less volatile than Apple’s, even though margins are roughly comparable.
  • We expect Google’s Revenue growth to decline to 17.7% in 2020, compared to Apple which should grow by 5.7%.
  • We expect Google’s and Apple’s Net Margins to remain almost flat in 2020, coming in at levels of 20% and 21%, respectively.

Google vs. Microsoft

  • Google’s P/E Ratio is roughly comparable to Microsoft’s at about 24x in 2019.
  • Google has a stronger track record of Revenue Growth (19% for Google versus 14% for Microsoft in 2019)
  • However, Microsoft has largely posted thicker Net Margins compared to Google (31% versus 20% in 2019 )
  • We expect Google’s Revenue Growth to slow to under 18% in 2020 while Microsoft’s growth could slow to about 12%.
  • We expect Microsoft’s Net Margins to see a 60 bps decline in 2020, while Google’s margins could decline by over 100 bps.

Google vs. Amazon

  • Google’s P/E Ratio is notably lower than Amazon’s (24x vs. 65x)
  • While Amazon’s Revenue Growth rates have been historically higher than Google’s, it is likely to slow to levels similar to Google’s Growth rate over 2019 (close to 20%)
  • Amazon’s Net Income Margins are also meaningfully lower than Google (4.3% vs. 22.5% in 2018)
  • Based on this, it’s likely Google’s stock will gain with respect to Amazon.

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