Alphabet (GOOG -3.50%) (GOOGL -3.53%) has minted a lot of millionaires since its public debut (as Google) in 2004. If you had invested $20,000 in that historic IPO, your stake would have grown by 6,850% to $1.39 million today.
However, investors who missed out on Alphabet's gains over the past 20 years might be wondering if it can still generate millionaire-making returns from here. Let's see if the tech giant could turn $20,000 into $1 million again over the next 20 years.
Image source: Getty Images.
Alphabet's business model and growth rates
From 2003 to 2023, Alphabet's revenue rose at a compound annual growth rate (CAGR) of 31% as its net income increased at a CAGR of 39%. That growth was driven by the expansion of Google's search engine and advertising network, its acquisition of YouTube in 2006, and the broadening of its ecosystem across the web browser, webmail, mobile software, and cloud infrastructure-as-a-service markets.
Alphabet also expanded into nascent markets like driverless vehicles, digital healthcare, and the development of experimental drugs, but it still generates the lion's share of its revenue from Google's advertising ecosystem, which faces unpredictable macroeconomic, competitive, and regulatory headwinds.
Over the past few years, Google's ad sales were affected by macroeconomic issues like inflation and rising interest rates, stiff competition from Meta's (NASDAQ: META) family of apps and ByteDance's TikTok, and government regulations aimed at limiting its access to people's personal data for crafting targeted ads. The pandemic also disrupted its ad sales throughout 2020.
To reduce its long-term dependence on ads, Google expanded its subscription-based services, Play Store, and hardware devices (which it categorized as its "other" revenue), and its cloud platform. But as the following table illustrates, the growth of its "other" segment was unpredictable and its cloud segment cooled off over the past few years. At the same time, its advertising growth decelerated, so its total revenue expansion slowed down.
|
Metric |
2019 |
2020 |
2021 |
2022 |
2023 |
|---|---|---|---|---|---|
|
Google advertising revenue growth |
16% |
9% |
43% |
7% |
6% |
|
Google "other" revenue growth |
21% |
28% |
29% |
4% |
19% |
|
Google Cloud revenue growth |
53% |
46% |
47% |
37% |
26% |
|
Total revenue growth |
18% |
20% |
41% |
10% |
9% |
|
EPS growth* |
12% |
19% |
91% |
(19%) |
27% |
Data source: Alphabet. *Adjusted for a 20-for-1 stock split in 2022.
On the bright side, Alphabet's earnings per share (EPS) growth accelerated again in 2023 as it laid off people, reined in its spending on its "moonshot" projects, and spent $61.5 billion on stock buybacks.
Alphabet faces unpredictable long-term headwinds
Google's advertising business is now expanding much slower than Meta's, and it faces unpredictable long-term challenges. Independent adtech companies like The Trade Desk are driving advertisers to break free from Google and Meta, Amazon is beefing up its own marketplace ads, and generative AI platforms like ChatGPT could pull users away from its search engine.
Google is upgrading its search capabilities with new AI features like its Bard chatbot and Gemini large language model, but it still seems to be trailing Microsoft (NASDAQ: MSFT) in the AI race. The Redmond-based software giant gained an early-mover advantage by backing OpenAI and integrating the start-up's AI tools into its own services.
Google also continues to pay Apple (NASDAQ: AAPL) billions of dollars every year to remain the default search engine on iOS. If Apple ever switches over to another search engine like Microsoft's Bing (a change that it reportedly considered in the past), Google could abruptly lose a large chunk of its advertising revenue and the global search market.
Finally, Google Cloud still ranks a distant third in the cloud platform market behind Amazon Web Services (AWS) and Microsoft Azure. Its growth rate is decelerating, and it won't offset the slower expansion of its ad business anytime soon.
Could Alphabet turn $20,000 into $1 million again?
Alphabet's stock looks reasonably valued today at 22 times forward earnings. Assuming its valuation holds steady, it would need to increase its EPS at a CAGR of 22% for 20 years to turn $20,000 into $1 million.
That might seem possible if it keeps cutting costs and buying back shares, but those strategies could lose their potency if its revenue growth continues to decelerate. If Alphabet fails to light a fire under its advertising and cloud businesses again, its valuation will likely contract, and it could be revalued as a slower-growth tech giant like Oracle.
That declining multiple -- along with the fact that a 50-bagger gain would boost Alphabet's market cap to a whopping $90 trillion -- will probably prevent this company from turning a $20,000 investment into $1 million over the next two decades. Alphabet could still generate impressive gains, but investors should temper their expectations as its core business matures.
