Valuation Analysis for Alphabet Inc (NASDAQ:GOOG)

This year Alphabet Inc (NASDAQ:GOOG) is expected to have its worst earnings growth since the credit crisis.  Analysts are currently expecting Google to grow earnings by only 1.63%.  However, immediately following this expected bad year is a good one, and in 2018 analysts are expecting earnings growth to accelerate aggressively to levels not seen since 2011.

As a result, there are wild fluctuations between earnings growth expectations for 2017 and 2018.

Currently, the stock trades with a PE multiple of about 27 times earnings which will increase if price remains the same an earnings come in as analysts currently expect them.

With that, the peg ratio for Google is currently 3.28 but it will skyrocket to over 17 if analysts are right about the lackluster growth expected in 2017.  Our assessment of fair value is when the peg ratio falls somewhere between 0 and 1.5, so both the current peg ratio and the 2017 expected peg ratio are well beyond the upper range of this boundary.  That tells us that valuation is excessive.

However, when factoring in 2018 expectations the peg ratio does fall to just below 1.5 again.

Accordingly, if price remains the same and earnings come in as expected Google would reach fair value at the end of 2018.

Our conclusion is that Google lacks immediate value and will only show value again at the end of 2018 given current earnings growth projections.

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GOOG Growth rate - Yearly

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GOOG PEG chart