There have been numerous headlines about Apple (NASDAQ: AAPL) becoming the first company to cross the $3 trillion valuation threshold or speculation about which company will be the next to join the $1 trillion market cap club, but what about the $2 trillion club? After all, only three companies have been worth more than $2 trillion.
One candidate that I think is in a solid position to join shortly is Alphabet (GOOG 0.82%) (GOOGL 0.72%). With its $1.65 trillion valuation, it must return just over 20% to join this exclusive club. But when will it get there? Let's find out.
Alphabet has market leadership in several key industries
Alphabet uses several technologies. Its most prominent is the Google search engine, the technology that revolutionized how we use the internet. While there have been some concerns about its ability to innovate, as competitors have rolled out chatbot-powered search engines, Google remains the top choice and is improving its chatbot search.
It also has a dark horse candidate for the best streaming service: YouTube. YouTube garners the greatest amount of U.S. screen time among streaming services, accounting for 8.8% of total time, higher than second-place Netflix at 8.2%. With that kind of position, YouTube is a sleeping giant in terms of revenue, as it only grew 4.5% in the second quarter.
While Alphabet has other divisions that are also promising, the most exciting to me is Google Cloud. Google Cloud is Alphabet's cloud computing service, and it has a vital role to play. Businesses can purchase computing space in Alphabet's data centers to crunch massive amounts of data to power machine learning (ML) and artificial intelligence (AI) models. In Q2, Google Cloud's revenue grew 28% year over year, the fastest of the big three in cloud computing. Additionally, this segment's profitability continues to rise rapidly, producing a $395 million profit compared to a $590 million loss last year. Its margins improved from Q1's 2.6% operating margin to Q2's 4.9%.
There's also massive growth ahead, as Mordor Intelligence (a market researcher) found that the cloud computing market is expected to grow at a 16.4% compounded annual growth rate to reach a market opportunity of $1.24 trillion by 2028 (for reference, it's at $580 billion today).
Google Cloud will benefit from an increase in AI usage, as most of the top generative AI start-ups utilize Google Cloud. In fact, more than 70% of the generative AI unicorns (private companies valued at over $1 billion) are Google Cloud customers.
With a strong lineup of divisions plus a massive growth catalyst on the horizon, Alphabet's stock looks like a shoo-in for a $2 trillion valuation someday, but when can investors expect that?
Alphabet's stock looks pretty cheap right now
Over the past decade, Alphabet's stock has tended to trade in the high-20s price-to-earnings (P/E) ratio range.
GOOGL PE Ratio data by YCharts
If you look at its current P/E of 27.5 times earnings, you might think that the stock is fairly valued. However, if you consider Alphabet's forward earnings, it looks pretty cheap for a tech giant. Because forward earnings utilize projections, investors get the benefit of Alphabet's advertising revenue returning to growth mode in the next year due to economic improvements. Suppose Alphabet's earnings grow at the expected rate and the stock ends up at a 28 times trailing earnings valuation in one year. In that case, Alphabet's stock will return 22%, the same amount it would take for Alphabet to achieve a $2 trillion valuation.
With that in mind, I think Alphabet should achieve a $2 trillion market cap sometime in 2024, but the bigger takeaway is that Alphabet's stock price could grow more than 20% in one year. That kind of market outperformance isn't common, making Alphabet a great buy now. Furthermore, with YouTube continuing to take market share from other streamers and media, plus its cloud computing growth, Alphabet looks like an excellent investment for the long term.
