Google Stock Analysis - Risk Reward Valuation

Google stock 2020 analysis. We are going to use Peter Lynch's categorization of fast growing stocks to analyze Google (Alphabet stock) GOOG, GOOGL. Fast growing stocks have certain characteristics and expectations and we are showing how Google stock fits those expectations. This should give you an answer whether GOOG is a stock you should buy or not.

More about the method can be found in this video on Peter Lynch: https://www.youtube.com/watch?v=jw1S1V4ASQw&feature=emb_logo

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Google stock is the top position of the Sequoia Fund, a legendary fund set up by Bill Ruane, a student of Benjamin Graham.

Google stock from a Peter Lynch perspective

When looking at Google stock, an investor that just read Peter Lynch’s book One Up On Wall Street would ask:
1. What is the safety of the investment, main risks?
2. What is the yield?
3. What is the growth rate?
4. What is the investing outcome I can expect over the long-term?

We are going to answer the above by looking at Google by categorizing the stock according to Peter Lynch’s stock categorization. Google would definitely be a fast grower given its yearly revenue growth of 19.5% over the last 5 years.

For each stock category, Peter Lynch has summarized his expectations and the following are for a fast growing company like Google is. Let's see how Google fits as an investment:

- If growth slows down the market doesn’t like it

Probably the biggest risk for Google, on a price to earnings ratio of 27, any change in the growth rate would impact the valuation too. NEGATIVE

- If finances become an issue Chapter 11 (bankruptcy is probable)

With no long-term debt and $31 billion in free cash flows in 2019, this is not an issue for Google. POSITIVE

- Look for good balance sheets making substantial profits

Google ticks this one perfectly, the balance sheet is strong with just $4 billion in long-term debt, return on capital employed has constantly been around the mid teen level and the business has high gross margins of 55%. There are many growth stocks, but few have a great business powering the growth. POSITIVE

- Figure out when they’ll stop growing and how much to pay for growth.?

This is why I am not investing in Google. If the growth rate continues to be 15% per year over the next 10 years, earnings will hit $172, with a valuation of 30, what the market currently applies for the growth rate, the stock price would be $5,188. That would give you a return of 15% per year in line with the growth.

But, what if the growth slows down to 10% after year 5? And then to 4% after year 10?

Gogle stock price in 2029 would be $1,661, for a return of 2.3% per year if Google's stock valuation is 12.

This leads us to the next question:

- At some point they will stop growing and turn into something else – that is the only guarantee. Check how much more room for growth there is.

What if in 5 years somebody offers the same what Google or Facebook are offering but without ads at all. First 10 years free and then with a monthly subscription price of $5. Perhaps they can even integrate your FB or Google account with theirs – it is your data after all. I have no idea what will happen, so it is a growth stock risk reward situation, if the growth stops the situation turns ugly. And, the growth can stop at any time given the nature of the tech environment.

- 20 to 25 percent is the best growth – 50 percent is for hot industries and you know what that means (hot industries attract many competitors)

Google is definitely not a hot industry anymore, a mature search engine with a moat.

- Proven, profitable expansion in more than one city or country

It is already global.

- PE ratio should be below the growth rate

PE ratio is double the growth rate, thus a risky play even for Lynch who loved fast growers.

- Check whether growth is expanding or slowing down.

Growth is slowing down.

- Look for those that few institutions own and that few have heard of.

It is in the top of the S&P 500, too late for that! It is already a big tech stock!

#googlestock #stocks #stockmarket