It was only twenty years ago that industrial and energy titans existed General Electric And ExxonMobil were the world’s most valuable companies by market capitalization, with values of $319 billion and $283 billion respectively. Now, just twenty years later, technological interests are leading.
At the top of the list are some of the world’s most well-known technology names. Apple tops the charts with $3.5 trillion (at time of writing). Nvidia And Microsoft are close behind, with market capitalizations of $3.2 trillion and $3.1 trillion, respectively.
With a market cap of just $2 trillion, it might seem a bit early to suggest that Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) has the makings of joining the $3 trillion club. However, the stock is up 88% since the start of last year and 172% over the past five years, and there is every reason to believe the rise will continue.
A combination of an improving economy, Alphabet’s market power and gains in artificial intelligence (AI) could give the company the boost it needs to join this exclusive society.
Improve performance
The widespread challenges of recent years have been evident, marked by macroeconomic headwinds and the worst inflation rates since the early 1980s. These conditions weighed heavily on each of Alphabet’s key business segments, and the stock fell as much as 44% in response.
However, there has been a clear improvement in recent months. In September, the Federal Reserve Bank cut interest rates for the first time since March 2020, and consumer confidence jumped to the highest level in months.
The economic recovery has had a dramatic effect on Alphabet’s results. In the second quarter, revenue of $84.7 billion rose 14% year over year, while diluted earnings per share (EPS) of $1.89 rose 31%.
Each of the company’s key operating segments contributed to improving results. The revival in the advertising sector, which has suffered the most in recent years, had the greatest impact. Google ads, which generate the bulk of Alphabet’s revenue, are up 11% year over year, while Google Cloud – the company’s fastest-growing segment – is up 29%.
A market leader – in more ways than one
Google has long been the undisputed leader in search, recently capturing 90% of the search market, according to Internet statistics aggregator StatCounter. The company has worked to consistently improve its search insights and the underlying algorithms, becoming something of an expert in AI along the way.
It is also the undisputed leader in digital advertising, driven primarily by Google Search and YouTube, but also by its suite of products that each count billions of users. Google is estimated to generate 39% of global digital advertising revenue by 2023, according to data collected by Statista. For context, its closest competitor — Metaplatforms — harvested only 18%. This dominance is expected to continue.
Alphabet is also a strong competitor in the field of cloud computing. Google Cloud is part of the ‘Big Three’ as the third largest provider of cloud infrastructure services. According to Canalys data, the company held about 10% of the market in the second quarter. It was also the fastest growing, with year-on-year revenue growth of 30%.
Demand for Google Cloud is being driven by the company’s generative AI offering. Alphabet has been using AI to inform its search results for years, and the company has refocused that expertise to power a range of AI-powered models led by Gemini, one of the leading fundamental AI models in the world. This attracts new users to Google Cloud.
The uncertainty is weighing on the stock
I would be remiss if I didn’t address the elephant in the room. The antitrust case against Alphabet is one step closer to completion. The court found that Google had violated antitrust law and the U.S. Department of Justice is considering recommendations regarding appropriate remedies, although the judge will have the final say. One of the possible outcomes is the collapse of the company, something that has not happened for decades. There are other, less stringent proposals, such as sharing Google’s search code with rivals, blocking other providers from paying Google to be the default search engine, and more.
It will be at least a year before a final decision is made, and if Alphabet appeals (it says it will), the case could drag on for several more years. Wall Street hates uncertainty, so this has been a cross over for Alphabet stock in recent months.
All that aside, even if Alphabet were to be split up – and I don’t believe that will happen – it could deliver additional value and thus enrich shareholders. So, in my opinion, the current concerns are just noise.
The road to $3 trillion
Alphabet currently has a market cap of roughly $2 trillion, meaning it would need a share price gain of about 47% to take its value to $3 trillion. According to Wall Street, Alphabet is expected to generate revenues of $347.4 billion in 2024, giving it a price-to-sales ratio (P/S) of roughly 6. Assuming the P/S remains constant, Alphabet should expand its business. sales to approximately $510 billion per year to support a market cap of $3 trillion.
Wall Street currently predicts revenue growth for Alphabet of about 11% per year over the next five years. If the company hits that benchmark, then it is could reaching a market capitalization of $3 trillion as early as 2028. It’s worth noting that Alphabet has grown its annual revenue 368% over the past decade, so Wall Street could be lowering its forecast.
Furthermore, Alphabet is currently selling for roughly 24 times earnings, a significant discount compared to the 30 multiple for the S&P500. The aforementioned uncertainty provides a very attractive entry point for savvy investors who plan to buy and hold for the long term.
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Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Danny Vena has positions at Alphabet, Apple, Meta Platforms, Microsoft and Nvidia. The Motley Fool holds positions in and recommends Alphabet, Apple, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Meet the unstoppable growth stocks that could join Apple, Nvidia and Microsoft in the $3 Trillion Club by 2028. was originally published by The Motley Fool
