Google shares performed exceptionally well last month closing at just under $400 at $395.71. They have risen strongly after hitting a short-term low of around $290 in March, although this wasn’t really a Google issue because the entire stock market was hitting new lows at this time.

So are Google shares worth buying at $400?

Well this is only my personal opinion of course but I think they are now starting to look overbought based both on technical analysis and earnings forecasts for the next few years.

With regards to technical analysis, the Supertrend indicator, which is one I use a lot, is still red on both the weekly and monthly charts which indicates that we are still technically in a downward trend, despite the recent price gains. Furthermore on the daily chart although the price is currently trading above the EMA (200) , the shorter term EMA (50) hasn’t yet crossed the EMA (200) so it’s still too early to tell if this is the start of a new bullish trend.

On a fundamental basis, I also think that Google shares are starting to look a bit pricey. There’s no doubt in my mind that Google will continue to grow it’s earnings slowly and steadily in future years but the future P/E ratio is already fairly high at current price levels.

For example, taking the average analyst forecasts from Yahoo Finance, we see that earnings are expected to come in at 21.06 for 2009 and 23.95 for 2010.

So assuming a price of $400, this gives us a P/E ratio of 18.99 for 2009 and 16.70. This compares to a sector average of 18.12 so these figures are not unreasonable by any means, but they would look much better value if you could purchase Google shares for say $350 (or even $300) which may be a possibility in the near future.

For instance a share price of $350 would give us an estimated P/E ratio of 16.62 for 2009 and 14.61 for 2010 and provides much more upside potential.

So overall although Google shares may well venture above the $400 mark, I personally would only really consider buying them if they were closer to the $350 level as this would represent a much safer investment.

 

 

Filed under: Stocks

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