Is GOOG Overvalued?

Ratios like P/E have been used for decades in order to try and quantitatively judge the value of a stock. Whether you agree with the rational or not, you can see how it’s important to at least have a relative scale when you’re attempting to assess stock valuation. That way, you can make a valuation assessment for the stock, relative to its peers. This gives you a reference point for your valuation.  Keep in mind, there are numerous valuation indicators you can use, and some of them might end up being contradictory. It’s up to you to determine which metrics you use.  Not only that, but you should understand why you choose the ones you did.  Further, you need to use a disciplined approach to investing if you choose a valuation method.

Overvalued Stocks Are Trading For Too High Of A P/E

Most analysts who are referring to ‘overvaluation’ mean that the P/E ratio looks ‘too high.’  They do not want to pay that multiple for that amount of earnings.  To them, this overvalued situation will likely be corrected when the stock crashes. A high P/E says the stock has already ‘ran up’ and if you chase it, you won’t make your money back. However, this judgment can sometimes be overruled if a stock has revenues that are growing very fast.  That’s why some people will combine P/E with a second indicator to determine their formula for whether the company’s stock is overpriced.  Some consider the Price/Earnings Growth.  They’re willing to put up with a higher P/E in the cases where the growth of earnings remains fast.  If they see a slow-down in either metric, they might change their evaluation.

When all is said and done, it’s up to the individual investor to decide what valuation metrics to use and how to use them.  Only you can determine if a stock is overvalued in your trading system.

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