When it comes to tech investing, it's not always easy to separate the wheat from the chaff. But in some cases, a company sticks out like a perfectly manicured index finger in a forest of sore thumbs.
Today, I'm talking about Google parent Alphabet (GOOG 9.96%) (GOOGL 10.22%). Online search and advertising has given Alphabet a massive $1.7 trillion market value so far, based on $300 billion in annualized sales and $71 billion of trailing free cash flows.
But where will Google's parent company go from here? Does it have any more room to grow while under attack from ChatGPT and other newfangled artificial intelligence (AI) alternatives?
You might wonder whether Alphabet's stock can double your money by 2030 under these circumstances. I think so, but let's run the numbers to make sure.
Search no more: This is the unshakable AI giant you're looking for
You may think Google is all about search engines and advertising. Well, you wouldn't be wrong, but that's just scratching the surface, like only appreciating Bruce Springsteen for Born in the USA and Born to Run. There's more to The Boss than the Born saga, and there's much more to Google than online search tools and ad spots.
Google has had its hands on the pulse of AI and machine learning for years now. In fact, it's safe to say that computer-assisted data analysis has been a core part of Google's operations from the very beginning. Some of these tools have surfaced to the public over time, but I'm sure Alphabet has a lot more AI muscle to show off in consumer-friendly services over the next couple of years.
For example, Google's AI can beat the humans at the complex games of chess and Go. It can compose cheesy poetry at the drop of a hat, and even recognize cats in YouTube videos (because, let's face it, we all need more cat videos). Deep-learning algorithms power the handy-dandy Google Translate service. Unsupervised machine learning helps Google Maps find the fastest route to your gym, given the current traffic conditions.
The list goes on and on. Despite my best efforts to keep up, I probably don't know half of it. Google is an AI powerhouse, and it makes a mint selling AI-powered tools to other businesses through the Google Cloud platform.
The numbers speak for themselves
Alphabet's revenue reached $74.6 billion in the just-reported second quarter of 2023. A 7% year-over-year revenue boost might not sound like much, but it was a solid recovery from the meek 3% gain Alphabet reported in the first quarter. The online advertising market is still tucked in bed with a bad head cold. But it's still better than the raging flu Alphabet suffered in recent quarters.
Even so, Alphabet remains an effective cash machine. Despite the weak ad sales, the company converted 24.6% of the incoming revenue into bottom-line earnings. Free cash flows came in at $21.5 billion, which works out to a 28.7% margin in terms of cash profits.
Those are some heavyweight numbers. The Google Cloud business provided the bulk of Alphabet's top-line growth, as usual, with a 28% year-over-year revenue increase. This division has been unprofitable for years, but broke that negative streak three months ago and continued to deliver positive operating profits in the second quarter.
The road to 2030
So could this behemoth really double your money by 2030? It may sound impossible to double one of the largest market caps in the history of investments, but let's take a look at what it takes to deliver a 100% gain in seven years.
All right, where's my calculator?
Including the advertising slowdown of 2022 and early 2023, Alphabet's sales had a compound annual growth rate (CAGR) of 20.6% in the last five years. What if that growth rate holds steady all the way through 2030, while Wall Street's market makers hold Alphabet's price-to-sales ratio steady at 6 times trailing sales?
Those figures would give us a 270% return in seven years -- way beyond the minimum rates required in order to double the stock price in seven years. Alphabet's market values would actually triple in six years and double by 2027 at that clip.
The pure math is clear: Doubling a stock price in seven years only requires an average annual gain of 10.5%. The S&P 500 (^GSPC 1.02%) market index had a 10.5% CAGR over the last decade. If all Alphabet can do is mirror the returns of the stock market at large, its stock price should still double by 2030.
Always in motion, the future is, and I can't promise specific long-term stock returns for Alphabet or any other security. But given the company's flexible business plan, heavyweight AI wizardry, and proven long-term growth prospects, the stock looks likely to double in value long before 2030.
