The U.S. economy has a centurylong history of producing the world's most valuable companies:
- United States Steel became the world's first $1 billion company in 1901.
- General Motors rode the automotive manufacturing boom to become the first $10 billion company in 1955.
- General Electric built a conglomerate selling a wide range of products from plane engines to household appliances, and it became the world's first $100 billion enterprise in 1995.
- Apple achieved a $1 trillion valuation in 2018 following the incredible success of devices like the iPhone.
Microsoft, Nvidia, Amazon, Meta Platforms, and Alphabet (GOOG 0.21%) (GOOGL 0.41%) have since joined Apple in the trillion-dollar club.
In fact, Apple, Microsoft, and Nvidia have each graduated to the ultra-exclusive $3 trillion level, but I think one more company is set to join them.
Alphabet is the tech conglomerate behind Google, YouTube, Waymo, DeepMind, and a host of other subsidiaries. It's a recognized leader in the fast-growing artificial intelligence (AI) space, which could be its ticket to a $3 trillion valuation by the end of 2025.
Alphabet is currently valued at $2.3 trillion, so investors who buy the stock today could earn a gain of 32% if it does join the likes of Apple, Microsoft, and Nvidia.
Image source: Alphabet.
Alphabet is transforming is legacy business with AI
Alphabet is at a crossroads. The company generates more than half of its revenue from Google Search, which has a 91% market share in the internet search industry. However, AI chatbots like ChatGPT offer a more convenient way to directly access information, and they can produce it instantly. Microsoft even struck a deal with OpenAI last year to use ChatGPT in its Bing search engine in an attempt to disrupt Google.
But Google Search has been the window to the internet for decades, so Alphabet arguably has more valuable data with which to build AI models than any other tech giant. It launched its own chatbot called Bard last year, which evolved to become a family of multimodal models called Gemini. They can interpret and produce text, images, videos, and even computer code.
Plus, Alphabet just introduced AI Overviews to the traditional Google Search experience. They are text-based responses that appear at the top of the search results, saving users from sifting through web pages to find answers to their queries. Alphabet says the reference links included in AI Overviews receive more clicks than those that appear in traditional search results, which could drive more advertising revenue and ease concerns over Google losing its dominance.
Plus, the Gemini models are creating several other opportunities to generate AI revenue. Google Workspace users can now add Gemini for an additional monthly subscription fee, which will help boost their productivity in applications like Google Docs, Sheets, and Gmail.
Additionally, the Gemini models are now available on Google Cloud, so developers can use them (along with more than 130 others from third parties) to build their own AI applications. This is a big cost saver for businesses compared to creating a large language model (LLM) from scratch, which takes time, truckloads of data, and substantial financial resources.
NASDAQ: GOOGL
Key Data Points
Solid financial growth
In the five years between 2019 and 2023, Alphabet revenue grew at a compound annual rate of 13.7%, bringing in a record $307.4 billion last year alone:
The company kicked off 2024 with an above-trend revenue jump of 15% in the first quarter (year over year). It included a 14.3% increase in Google Search revenue alone, which was the fastest pace in almost two years. YouTube's revenue expansion accelerated to 20.8%, and Google Cloud remained the fastest-growing part of the business, with sales soaring by 28.4%.
Improved market conditions were a big help, following a painful slump in the advertising industry throughout 2022 and 2023 due to uncertain economic conditions. But Alphabet could experience even faster growth in the second half of this year, because the U.S. Federal Reserve is forecast to cut interest rates three times in the coming months. It could prompt businesses to spend more money on marketing as they try to reach a consumer with more dollars in their pocket.
Alphabet's (mathematical) path to the $3 trillion club
Alphabet generated $6.52 in earnings per share over the last four quarters, and based on its current stock price of $185.01, it trades at a price-to-earnings (P/E) ratio of 28.3.
That's cheaper than the 32.7 P/E ratio of the Nasdaq-100 index, so Alphabet is technically undervalued relative to its peers in the tech sector.
It also makes Alphabet much cheaper than all three members of the $3 trillion club, which trade at an average P/E ratio of 50.2 (which is heavily skewed by Nvidia's lofty valuation):
I don't think it would be appropriate for Alphabet's P/E to rise to 50.2, but if it did, that would value the company at over $4 trillion. But it could rise to the average P/E ratio of Apple and Microsoft (37.6), which would be enough to place Alphabet in the $3 trillion club.
But even if Alphabet doesn't experience any multiple expansion (a rise in its P/E ratio), it could join the $3 trillion club within the next 18 months solely based on the growth of its business.
How? Wall Street expects the company to deliver $8.61 in earnings per share in 2025, placing Alphabet stock at a forward P/E ratio of 21.5. That means its shares will have to rise 32% between now and then just to maintain their current P/E ratio of 28.3. That gain will be enough to value the company at $3 trillion.
I'm not the only one who thinks Alphabet is a great value at the current price. The company expanded its share repurchase program by a whopping $70 billion earlier this year, which means it will periodically buy chunks of its own stock to return money to shareholders.
In summary, Alphabet has more than one path into the exclusive $3 trillion club, and investors who buy the stock today could earn a nice gain along the way.
