Is Google's Stock Overvalued Or Undervalued?

Alphabet Inc GOOG GOOGL shares have outperformed the S&P 500 in 2021, generating a year-to-date total return of 58.6%.

Alphabet is still putting up impressive growth numbers. But with a $1.89 trillion market cap, some investors are wondering if there’s any value left in Alphabet stock.

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is currently at about 34.6, more than double its long-term average of 15.9.

Alphabet’s PE is currently 30.1. Not only is that number under the S&P 500 average as a whole, Alphabet’s PE is actually down 2.5% over the past five years, suggesting its earnings multiple is on the low end of its historical range.

Related Link: Is Microsoft's Stock Overvalued Or Undervalued?

Growth: Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.7. Unfortunately, Alphabet’s forward earnings multiple of 26.1 doesn’t make the stock undervalued at its current price. It appears to be roughly in-line with its technology sector peers that are averaging a 26.4 forward earnings multiple.

However, when it comes to evaluating a stock, earnings aren't everything.

Growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 1; Alphabet’s PEG is 1.2, a relatively attractive valuation for a megacap tech stock.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.1, nearly twice its long-term average of 1.62. Alphabet’s PS ratio is 8.6, not exactly the bargain value investors are typically looking for.

Finally, Wall Street analysts see solid gains for Alphabet shares over the next 12 months. The average analyst price target among the 40 analysts covering Alphabet is $3,195, suggesting about 13.9% upside from current levels.

The Verdict: At its current price, Alphabet stock appears to be somewhat undervalued, especially compared to other high-growth tech stocks.