Given that nearly half of American companies have price-to-earnings ratios, or “P/E’s,”below 16x, Alphabet Inc. (NASDAQ:GOOGL), with a P/E ratio of 26.3x, may be a stock to stay away from completely. Still, to find a reason for the extremely high P/E, we would have to delve a little further.
Alphabet has been doing fairly well lately, with its earnings growth in positive territory relative to the declining earnings of most other companies. Investors likely believe the company will continue to navigate the broader market headwinds better than most, which explains why the P/E is so high. You would really hope so, because if not, you’re spending a significant amount of money for no apparent benefit.
See the most recent analysis we have for Alphabet.
Is Growth Consistent With The High P/E?
Alphabet’s price to earnings ratio is about average for a business that should grow rapidly and, more significantly, outperform the market.
The company reported a fantastic increase of 27% in earnings growth in the most recent year. Due in large part to its recent strong performance, EPS has increased by 101% over the last three years. In light of this, it is reasonable to state that the company’s recent earnings growth has been exceptional.
Regarding the future, analysts following the company project growth of 16% annually over the next three years. The rest of the market, on the other hand, is expected to grow at a much slower rate—just 11% annually.
Given this, it makes sense that Alphabet has a higher P/E than most other companies. It seems that the owners are reluctant to sell something that might be looking toward a better future.
What Can We Infer From The P/E of Alphabet?
The price-to-earnings ratio is a useful indicator of expected profits, but it shouldn’t be the only consideration when making a purchase decision.
As expected, given its projected growth exceeding that of the overall market, Alphabet is able to sustain its high price-to-earnings ratio. Investors believe there isn’t enough room for a decline in earnings at this point to support a lower P/E ratio. Given these conditions, it is difficult to predict that the share price will drop significantly in the near future.
The balance sheet of a business can contain many potential risks. You can find any potential problems by using our free balance sheet analysis for Alphabet, which includes six easy checks.
You might want to check out this free list of other businesses with low P/E ratios and strong earnings growth if P/E ratios are of interest to you.