Everyone loves Google Inc., the company. Not everyone loves Google, the stock. This could change, though.
With supercharged revenue and earnings growth, the stock has looked expensive from the start of the company's publicly traded life, in 2004. Its price-to-earnings ratio shot above 60 in 2006, an echo of those absurd days during the tech bubble in the late 1990s.
Now, though, Google has a new look. Its share price, at about $500 (U.S.), is back to where it was three and a half years ago. Even though its earnings were barely affected by the financial crisis and ensuing recession, investors are willing to pay far less for those earnings.
Using trailing earnings, the stock's P/E has fallen below 23, near a record low. And using estimated earnings, the P/E is a mere 18, making it look more like a plodder than an exciting growth stock.
Part of this lower valuation is no doubt due to concerns that Google's competition is heating up, making the company's growth look less reliable. Investors have seen this transition before, and the results are rarely pretty.
Starbucks Corp., Microsoft Corp. and Research In Motion Ltd., to name a few, were growth stocks that could do no wrong. They, too, traded with heady valuations during their golden days, only to see those valuations shrink when competitors moved in on their turf.
You did okay if you were nimble enough to buy these stocks at their recent lows, but anyone who bought them at the height of their good-news stories got slaughtered. In particular, RIM and Microsoft are still down more than 50 per cent from their record highs.
The market is suggesting that Google is about to join their ranks (the stock is down more than 30 per cent from its high). That's actually good news, though, for new investors. If the market is right, you're investing in an absurdly profitable company at a reasonable price. And if the market is wrong, the upside is tremendous.