Alphabet (GOOG -1.96%) (GOOGL -1.97%), the parent company of Google, has generated a return of roughly 800% over the past 10 years for its investors -- more than doubling the NASDAQ's gain of nearly 400%.
Alphabet also remained resilient throughout the pandemic, as the growth of its cloud business offset its temporary slowdown in ad sales. It also avoided a post-lockdown slowdown as its advertising and cloud businesses grew in tandem. As a result, Alphabet's stock rallied 65% in 2021, soundly outperforming the NASDAQ, the S&P 500, and even Cathie Wood's growth-oriented ARK Innovation ETF by significant margins.
Can Alphabet continue to generate those market-beating gains over the next decade? Let's evaluate the long-term growth potential of its core businesses, as well as its nascent side businesses, to find out.
Image source: Google.
Maintaining its leadership in digital ads
Alphabet generated 81% of its revenue from Google's ads (including YouTube) in the first nine months of 2021. Google's sprawling ecosystem, which crafts targeted ads based on a user's personal data and browsing habits, enables it to share a near-duopoly in the digital advertising market with Meta's Facebook and Instagram.
But over the next few years, Google's market share could gradually decline as Amazon (AMZN -1.65%) and other smaller advertising platforms carve up the market. For example, eMarketer expects Google's share of digital ads in the U.S. to decline from 28.6% in 2021 to 26.4% in 2023.
However, the global digital advertising market could still grow at a compound annual growth rate (CAGR) of 15.3% between 2020 and 2025, according to Research and Markets. The research firm also expects the market to continue expanding at a CAGR of 13.7% between 2025 and 2030.
Therefore, the growth of the broader digital advertising market, led by higher-growth emerging markets, could easily offset any of Google's market share losses to other advertising platforms. Google's advertising business could easily match the market's growth rate if it overcomes its near-term challenges, including antitrust probes, Apple's privacy changes on iOS, and its plan to block all third-party cookies on Chrome by late 2023.
Those changes could force Google to reduce its dependence on targeted ads and rely more on first-party data and contextual ads. That transition might be bumpy, but it will likely remain a top advertising platform for businesses as long as it dominates the online search and video markets.
Keeping up with Amazon and Microsoft in the cloud
Alphabet's other core growth engine is Google Cloud, which generated 7% of its revenue in the first nine months of 2021.
According to Canalys, Google Cloud only controlled 8% of the global cloud infrastructure market in the third quarter of 2021, putting it in a distant third place behind Amazon Web Services (AWS) (32%) and Microsoft's (MSFT -2.45%) Azure (21%).
Google Cloud is still growing rapidly. Its revenue rose 46% to $13.1 billion in 2020 and grew another 48% year over year to $13.7 billion in the first nine months of 2021. Its 8% share in Q3 also marks an improvement from 7% a year ago and 6% in Q3 2019.
Looking ahead, the global cloud market could expand at a CAGR of 17.3% between 2021 and 2027, according to Report Ocean. Google Cloud will likely match -- or even surpass -- that growth rate if it merely keeps pace with Amazon and Microsoft in the cloud infrastructure race.
Expanding its other businesses
Investors currently don't pay much attention to Alphabet's other divisions, which include its hardware products (Pixel, Home, Nest, and Fitbit), subscription services, life science divisions, and the Waymo driverless unit.
But over the next decade, these smaller businesses could start generating a much larger percentage of Alphabet's revenues. Its hardware devices could benefit from the ongoing expansion of the smart home and Internet of Things (IoT) markets, its Calico and Verily life science units might launch innovative medical treatments and devices. Waymo could launch more robotaxis or license its driverless technology to major automakers.
The estimates for these next-gen markets are jaw-dropping. According to Fortune Business Insights, the global IoT market could expand at a CAGR of 25.4% between 2021 and 2028. The same firm expects the driverless vehicle market to grow at a CAGR of 31.3% between 2021 and 2028.
A clear path toward sustainable double-digit growth
Analysts expected Alphabet's revenue to rise 39% in 2021. They predict it will rise 17% in 2022 and 16% in 2023. We should take those long-term estimates with a grain of salt, but the industry growth forecasts for the digital advertising, cloud, IoT, and driverless markets all indicate that Alphabet could easily hit those targets and generate double-digit revenue growth every year for at least the next decade.
If Alphabet grows its top line at a CAGR of 15% over the next decade, its annual revenue may quadruple from an estimated $254 billion in 2021 to more than $1 trillion in 2031. That growth might be interrupted by antitrust threats, platform changes, or economic downturns along the way, but Alphabet still has a path toward generating more multibagger gains over the next decade -- even for investors who missed its last 10-year run.
