Check your price to earnings ratios and your price to book ratios for each of your assets. It has been an upward ride, so "foolish" stocks like Alphabet tend to rise faster. I would begin to consider purchasing, if it were me, at $225 per share. Whether I would pay that much would depend on a deep investigation of the firm's financials. I could see an argument made where it could be purchased at $450, but that depends enormously on a serious investigation.
The thing you may be forgetting is that tech is just a business like any other business. You can make a fortune buying stocks in companies that make noodles and lose a fortune in companies that live off of ads. The reverse is also true.
You should avoid paying more than 15 times trailing twelve-month earnings, though you can make exceptions if the operating cash flows and the operating earnings are persistently far apart for reasons that make the operating cash flows more indicative of the money a future shareholder would likely receive in dividends.
You should avoid paying more than 1.5-2.0 times book value after you have made adjustments to convert accounting values to economic values.
A PE of 15 covers most growth rates and most discount rates as the extreme upper bound for a purchase. You can go into the low 20's in the presence of a belief that returns will grow at upper twenty-something rates for a very long time.
Alphabet is a great firm, but a great firm at insane prices should be sold to the other person who doesn't understand the concept of present value.
The very first thing you should do, before purchasing a company, is to try and determine if there are fundamental risks to the survival of the firm. A cursory review of its balance sheet would imply there is no existential risk out there. Although I saw a few things that could trigger distant future concerns from a cursory inspection, there was nothing earth-shattering.
If you have decided that the firm will certainly survive, then you should look at its earning power. What is its capacity to build, grow and preserve earnings? Remember Yahoo was once Google and its profit centers were wider in scope.
After you have decided on its earnings power, you need to decide on a minimum rate of return that you will accept. I use twice the AAA corporate bond rate plus extra if I have concerns about the firm.
Once you have a rate, then you need to discount future cash back to present value. Again, for most things, that ends up being less than or equal to 15 times earnings. When firm prices are too high, people who could have purchased Alphabet can instead fund venture capital firms to find the next Google and eat its lunch. By being an initial investor in these new firms, the rate of return should be through the roof, instead of a subsequent investor such as yourself. It is more valuable to try and kick Alphabet out of the market than to buy it.
Imagine tomorrow morning, GOOG collapsed to $100. Then it would move from the foolish category to the wise category, and you should be loading up on it.
Once you have determined the health, stability, and earnings power of the firm, the price is everything. You want to buy low and then sell it to someone who doesn't know how to discount assets back to present value.
My reading of its SEC filings was cursory. I think there is an 80-90% chance I would own shares in Alphabet if I could purchase them at favorable prices. If it collapsed tomorrow to $100, I would probably buy call options contracts by the boatload so that I could have the time to read and review what I think is most likely an excellent firm. While I didn't really see any material worry in the firm, a cursory review is not due diligence. I have seen firms that looked fine upon cursory review and dreadful once you really read the notes and did serious analysis.
If you are sure of the firm's internal operations, financing decisions and potential in the next iteration of search and other markets, then get out a spreadsheet, pull the quarterly and annual financials as far back as you can go, grab the proxy statement and the initial prospectus and get serious about determining the upper and lower bounds of free cash flows. Discount them backward and make a fortune by underpaying for the privilege of being able to say you own Alphabet.
EDIT
Per the request in the comments, I am following up.
I just taught a class today using Apple as the example firm. Now, after the fact, we know that buying one share of Apple at the IPO would send you on a very healthy vacation today. One hundred shares would make you a millionaire. This is known because history has played itself out. This was not known at the outset. Indeed, Apple almost went into bankruptcy on several occasions. Tools for pricing should embrace skepticism and an acknowledgment of the inability to predict the future. Indeed, if one views the price, dividend, income, and cash flow streams of the thousands of firms that have been publically traded, one becomes skeptical.
The use of a 15 PE, assuming the PE is a reasonable estimation of true operating earnings, comes from the fact that if you build a table of growth rates and discount rates, a PE of 15 sits near the frontier of reasonableness given the intrinsic uncertainty going into the future. I, for example, can think of one way to dominate Google's search engine. I am not going out to build an alternative because I have bigger things to do, but I would be surprised if the same idea hasn't crossed the minds of the executives at Google. It may not have. Yahoo's investors would be stunned at its downfall and the assent of Google. Nothing protects Google more than it protected Yahoo than it protected Alta Vista.
A PE of 15 is recommended because you are not a securities analyst and haven't been trained to critically take apart financial statements. A PE of 15 will keep you out of trouble. Could it be higher? Yes. A lot higher? No.
The recommendation of price to book of 1.5 to 2.0 assumes the book value is valid. In the real world, stated book values are a noisy estimator of true book value. I teach students how to restate book just as I have them restate income.
The issue with high price to book ratios, particularly if the industry or industry leader has them, is that they invite competition. It is costly to become publicly traded. This grants a moat around those firms that are already in the public domain because it is costly to go public. This allows a premium to book without a big problem until it becomes large.
Consider a firm with a real book value of $10 per share that is trading at $30 per share. An individual investor could pay $30 to buy one share, or (and this is a bit mythical because of the dollar amount in the example) invest $10 in three different firms to compete against the incumbent firm. The entire concept of venture capital is predicated on this.
Let us imagine that Google's earnings finally reach $50 per share and Google becomes a cash cow with no real growth past that point. At 15 times earnings, it would be worth $750 per share. Had you paid $225 per share, you would have made a profit. Had you paid $1000 per share you would take a loss, even though it performed well. This is what happened to RCA's investors. The highest price paid was twice the price it ever achieved again in the eighty years that followed until it was bought out by Bertelsmann. The actual internal rates of return vastly exceeded anyone's belief. TV, it turned out, was a big deal. Still, once the price peaked in the 1920s, it never recovered over its entire life.
Now I am not saying Google will top out at $50 per share in earnings. I have no clue. I don't use crystal balls. I don't care enough to really look at Google's drivers either. What I am saying is that over the space of all historical firms, including the most amazing, it comes to an end. It may take a long time, but it comes to an end.
Google is not the only firm on Earth. I did a search for underpriced firms and I was surprised at the names on the list. You would recognize quite a few of them. It is possible that Google's price will never fall again. They may have a secret hidden behind the curtain that will be brought out to the public in an announcement tomorrow morning that will materially change their earnings forever. I work with what I can see. It is a prejudice, but it is a protective prejudice.
EDIT
I left out part of my prior comments, but it seems that @salmoncrusher is missing the concept of present value. Limiting the price to earnings ratio to under 15 is linked to the idea of a Kelly bet. A Kelly bet provides the highest possible long-run rate of return when you gamble on any random process.
If return, r, is defined as future value divided by present value minus one such as r=p(t+1)q(t+1)/[p(t)q(t)]-1, dropping the -1 has no impact on our conversation so we will do so. If we ignore bankruptcy, mergers, and stock splits to make the discussion a bit more simple, then we can define q(t)=q(t+1) for all values of t. This reduces the reward for investing to r=p(t+1)/p(t).
Now we can define a price to earnings function h(t)=p(t)/y(t) where y(t) is earnings. The reward for investing can now be thought of as r=h(t+1)y(t+1)/[h(t)y(t)]. We are also ignoring dividends as they just make the math complicated but with the same result.
If we define g(t)=y(t+1)/y(t) then we have our growth factor over the holding period. This could be converted to an annualized rate, but it isn't necessary for the point to be made. The reward for investing can now be defined as r=[h(t+1)/h(t)]g(t). Note that unless you buy out the shares of the firm and control the management then it follows that g(t) is not in your control. You can estimate it, but you cannot control it.
Now, let us imagine the price of GOOG is just a little higher so its PE is 60 instead of 56 so I don't have to do anything other than simple math. If the PE were 60 and it fell to the historical median price, then r=15/60*g(t)=.25g(t). In order to break even g(t)=4. The company has to quadruple its earnings over the holding period just to break even. Now, if the period of time is long enough, then this isn't a big deal. However, what if you wanted to be profitable? Let us imagine you wanted an 8% return.
1.08^t=.25g(t) so t=(log(.25)+log(g(t)))/log(1.08). If t=5 years, then g(t)=5.88. That is a 42% annual compounded growth rate in order to get 8%. Alphabet's earnings have grown at the very healthy rate of 14% per year, but not 42%. It could be it takes 10 years for Alphabet to revert to normal pricing, or 1, or 20. Still, the only thing an investor can control is the highest amount of money they would pay, which brings us to Kelly bets.
We cannot calculate a Kelly bet here for two reasons. The first is that this forum doesn't support mathematical notation and so it would be insane to even attempt it. I have no idea how to talk about integrals or derivatives here. The second is that it isn't really necessary to make the point.
As h(t) becomes smaller, r automatically becomes larger, regardless of the value of g(t) or h(t+1). The probability of accomplishing some goal increases if the goal can be stated in terms of something such as r>8% per year. In that case, the problem becomes a binomial which is convenient because most stocks lack a mean return because the density function cannot have one. If the limit book was normally distributed about the equilibrium prices, then in the example above, the density of r must be the truncated Cauchy distribution. See http://mathworld.wolfram.com/RatioDistribution.html for more information.
By being able to state a fixed minimum goal, you inherit the properties of the binomial distribution. As purchase price falls or as purchase PE falls the probability of accomplishing your goal increases and the variance of outcome decreases. This is due to the fact that the maximum variance of a binomial is at a 50% probability and falls when you move in either direction.
By exposing less money per unit of risk and by reducing the probability of goal failure, you have reduced aggregate risks. You can use this fact to construct optimal allocation rules under a Kelly bet. A limiting PE of 15 isn't sacred, I believe Benjamin Graham limited it to 20 for passive investors that didn't want high returns and didn't want to do much work, but 15 for investors who were looking for better deals and higher returns. See the Intelligent Investor by Graham.
Nonetheless, a low PE is protective and provides higher returns. If mathematical notation was allowed, then we could do a more formal discussion of the linkage between Kelly bets, price to X ratios, and the concept of present value.
