NASDAQ:GOOG.L) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 19x and even P/E’s lower than 10x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it’s justified.” data-reactid=”28″>With a price-to-earnings (or “P/E”) ratio of 33.9x Alphabet Inc. (NASDAQ:GOOG.L) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 19x and even P/E’s lower than 10x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it’s justified.
With earnings that are retreating more than the market’s of late, Alphabet has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.
See our latest analysis for Alphabet ” data-reactid=”30″> See our latest analysis for Alphabet
free report is a great place to start.” data-reactid=”47″>Keen to find out how analysts think Alphabet’s future stacks up against the industry? In that case, our free report is a great place to start.
Is There Enough Growth For Alphabet?
In order to justify its P/E ratio, Alphabet would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 8.2%. Even so, admirably EPS has lifted 64% in aggregate from three years ago, notwithstanding the last 12 months. 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.
Turning to the outlook, the next three years should generate growth of 17% per annum as estimated by the analysts watching the company. That’s shaping up to be materially higher than the 13% per annum growth forecast for the broader market.
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 Key Takeaway
The price-to-earnings ratio’s power isn’t primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
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. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren’t under threat. It’s hard to see the share price falling strongly in the near future under these circumstances.
free balance sheet analysis for Alphabet with six simple checks on some of these key factors.” data-reactid=”56″>The company’s balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Alphabet with six simple checks on some of these key factors.
list of companies with a strong growth track record, trading on a P/E below 20x. ” data-reactid=”57″>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.
Get in touch with us directly. Alternatively, email [email protected].” data-reactid=”58″>This article by Simply Wall St is general in nature. 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.