For many investors, realizing the importance of valuation, looking beyond price, is a key epiphany. Valuation is very important, but can also be tricky. For example, consider how many people have forsaken stocks like LinkedIn and Tesla due to their Price to Earnings multiples (high for LNKD and “does not compute” for TSLA). Yes, current prices are high relative to earnings for these stocks. However, price and even valuation itself can be relative.
For example, Google had earnings per share of $0.41 in 2003. When the company went public at $100 in 2004, it had a trailing P/E of over 200 times. To many GOOG seemed expensive then. Today GOOG trades at $855 and has EPS of $35.66 (trailing twelve months). That yields a P/E of about 25 times. Despite an eight-fold increase in price, GOOG’s valuation now looks 8 times less expensive! This was because Google’s earnings growth was even more spectacular than it’s price performance, shown below.
Of course not every stock can be like Google. Yahoo, for instance, is still down 70% from its highs reached in 1999. And the truth is the market has seen more “yahoos” than the likes of Google.