Are the Four Horseman Overvalued?

I think some markets are in a frenzy.  Such markets include oil, China, the Canadian dollar, Brazil, fertilizer shares and the stocks known as The Four Horseman.  These stocks are Google, Apple, Research in Motion and Amazon.

The Four Horseman may be in a frenzy but are they overvalued? 

Now, full disclosure, I'm a value guy.  I tend not to dabble in this area.  But I am not so skeptical as to  anoint all high growth stocks as "overvalued" as some value managers do.  They are not.  Some are perfectly reasonable if not undervalued given their growth prospects. 

So are the Four Horseman reasonably valued given their growth prospects?

First, let's look at the charts.  The four have been horses the past 12 months.

Google (GOOG)

Apple (AAPL)

Research in Motion (RIMM)

Amazon (AMZN)

Next, let's look at projected earnings growth.  GAAP estimates for the four over the following years are

GOOG
2007 -  $13.34
2008 - $18.01
2010 - $29.81

AAPL
2007 - $4.04
2008 - $4.73
2010 - $7.46

RIMM
2007 - $2.17
2008 - $3.27
2010 - $3.95

AMZN
2007 - $1.11
2008 - $1.62
2010 - $3.36

I use GAAP estimates, not estimates less expenses-companies-don't-want-you-to-see.

Compounded annualized growth rates from 2007 through 2010 are

GOOG - 31%
AAPL - 23%
RIMM - 22%
AMZN - 45%

Closing prices today for each stock were

GOOG - $703
AAPL - $187
RIMM - $122
AMZN - $88

The price/earnings ratio on 2008 GAAP estimates are

GOOG - 39x
AAPL - 40x
RIMM - 37x
AMZN - 54x

Growth money managers often compare the rate of growth to the PE multiple to determine if they are paying a fair price for the stock's growth.  This is known as the PE to growth, or "PEG" ratio.  For example, if a company is growing at a rate of 20% per year and has a 20 PE multiple, the PEG ratio is 1.  If the company has a growth rate of 20% and a PE multiple of 40, the PEG ratio is 2.  The general rule of thumb is if a stock has a PEG ratio of 1 or less, it is cheap.  If it has a PEG ratio of 2 or more, it is expensive. 

Given the above figures, what are the PEG ratios of each stock?

GOOG - 1.27
AAPL - 1.75
RIMM - 1.69
AMZN - 1.21

It appears that the stocks are not expensive given the levels of growth. 

If you use a PEG of 2 (with the exception of Amazon which is coming off a low base and thus a target PEG of 1 assigned), what is the upside from current levels?

GOOG - $1,107, 57%
AAPL - $214, 14%
RIMM - $144, 18%
AMZN - $73, -17%

The question the skeptical value manager asks is whether or not the growth rates are real.  The growth manager would counter that earnings estimates continue to rise and growth may, in fact, be higher.  Over the past 12 months, for example, estimates for the four have risen by 50% to over 100%.

Now, I'm not saying you should run out and buy these stocks tomorrow - I own none of them.  Nor have I deeply researched any of these stocks.  However, given the defined parameters, the stocks have room to run. 

Comments

[TraderMark]

Toro, I just sold Google and only keep Apple. RIMM has been expensive throughout and AMZN just not my cup of tea. That said, compared to Baidu, Google is dirt cheap but playing the 'relative valuation' games is what drove everything up in the late 90s. p.s. Cramer shot Amazon so its 3 horseman now. They have held up very well and seem to be the place a lot of big money is hiding out so relative strength is amazing even in downturns (exlc AMZN)

I think Apple and Google will truly intertwine within every facet of 'entertainment culture' in the next decade so they deserve a premium. But they have had huge runs so I have moved to other places for better near term returns. That said, the moves are relentless.