Alphabet Inc.’s (NASDAQ:GOOGL) price-to-earnings (or “P/E”) ratio of 18.4x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 14x and even P/E’s below 8x are quite common. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s lofty.
Alphabet hasn’t been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.
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Is There Enough Growth For Alphabet?
The only time you’d be truly comfortable seeing a P/E as high as Alphabet’s is when the company’s growth is on track to outshine the market.
Retrospectively, the last year delivered a frustrating 3.2% decrease to the company’s bottom line. Still, the latest three year period has seen an excellent 120% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Looking ahead now, EPS is anticipated to climb by 14% each year during the coming three years according to the analysts following the company. With the market only predicted to deliver 9.4% per annum, the company is positioned for a stronger earnings result.
In light of this, it’s understandable that Alphabet’s P/E sits above the majority of other companies. Apparently shareholders aren’t keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On Alphabet’s P/E
Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.
We’ve established that Alphabet maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
A lot of potential risks can sit within a company’s balance sheet. Our free balance sheet analysis for Alphabet with six simple checks will allow you to discover any risks that could be an issue.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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