Eight American technology companies joined the exclusive $1 trillion club since Apple blazed the trail in 2018, but only three have gone on to amass valuations of $3 trillion or more:
- Apple: $3.5 trillion
- Microsoft: $3.1 trillion
- Nvidia: $3.1 trillion
One more could join them within the next couple of years. Alphabet (GOOG +10.00%)(GOOGL +10.06%) is the world's fifth-largest company, with a market capitalization of $2.3 trillion. It's experiencing strong growth thanks to artificial intelligence (AI), which is transforming its legacy businesses, such as Google Search and Google Cloud.
Here's how Alphabet can chart a path to the ultra-exclusive $3 trillion club.
Image source: Alphabet.
Google Search is transforming for the AI era
AI chatbots like OpenAI's ChatGPT offer a new way to access information online. Since they can provide direct answers to almost any question, they provide a more convenient user experience than traditional search engines, like Google, which require users to sift through web pages to find the information they need.
Alphabet developed the Gemini family of large language models (LLMs) to compete with OpenAI's latest models, and it released a chatbot with the same name. However, Gemini is also powering new features within Google Search to protect its dominant market share during the AI era.
One of those features is AI Overviews, which uses a combination of text, images, and links to third-party websites to produce complete responses to user queries. They appear at the top of the traditional search results, so users no longer have to click through to different web pages. Alphabet says Overviews are live in more than 100 countries and are driving people to use Google Search more frequently because they can ask different questions and extract more information than before.
Plus, Alphabet says Overviews monetize just as well as traditional sponsored ads in Google Search results, so they shouldn't cannibalize its advertising business. Last year, Alphabet noticed that the links placed within Overviews received more clicks than the same links placed among traditional search results, which might create an opportunity to make even more money in the future.
Monetization is extremely important because Google Search generated $54 billion in revenue during the fourth quarter of 2024 (ended Dec. 31), representing more than half of Alphabet's total revenue of $96.4 billion.
Google Cloud is Alphabet's growth engine thanks to AI
Although the search business accounts for the lion's share of Alphabet's revenue, Google Cloud is the conglomerate's fastest-growing segment. It generated $11.9 billion in revenue during Q4, up 30% from the year-ago period (compared to just 12% growth in search revenue).
Google Cloud operates data centers worldwide and provides many different services to help its business customers transition into the digital age. However, it's also becoming a popular destination for businesses needing data center computing capacity and ready-made LLMs (like Gemini) to build their own AI software.
Alphabet says customers are currently using eight times the amount of computing capacity for AI training and inferencing than they were just 18 months ago. Plus, the number of developers using Gemini models to create their own AI software through Google Cloud doubled over the last six months to 4.4 million.
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Key Data Points
Moreover, Google Cloud's AI developer platform, Vertex AI, saw a fivefold increase in customers during 2024 and a whopping 20-fold increase in usage. It now hosts more than 200 LLMs (including Gemini) for customers to choose from, giving them an incredible amount of variety to suit almost every use case.
Alphabet allocated a record $52 billion to capital expenditures (capex) during 2024, most of which went toward building AI data center infrastructure and buying chips from suppliers like Nvidia. The company plans to increase its capex spending to $75 billion during 2025, which is the main reason its stock price sank by 7% the day after these results were released.
Capex spending eats into profits, so investors are concerned about a potential dip in Alphabet's future earnings. However, Nvidia CEO Jensen Huang says for every $1 cloud providers spend on AI hardware, they could earn $5 over four years. Therefore, the long-term payoff could be enormous for Alphabet and its shareholders.
Alphabet's (mathematical) path to the $3 trillion club
Alphabet generated $8.04 in earnings per share (EPS) during 2024, which places its stock at a price-to-earnings (P/E) ratio of 23.7. That makes it significantly cheaper than Nvidia, Microsoft, and Apple, which trade at an average P/E ratio of 39.7:
NVDA PE Ratio data by YCharts. PE Ratio = price-to-earnings ratio.
If Alphabet's P/E ratio simply rises to meet the average of the other three $3 trillion companies (39.7), it would translate to a 67% increase in its stock price and its market capitalization. In other words, Alphabet would become a $3.8 trillion company.
Alphabet could also join the $3 trillion club if its P/E ratio remains the same (23.7) but grows its EPS by 30%. Wall Street's consensus forecast (provided by Yahoo!) suggests Alphabet's EPS could reach $10.22 in 2026, translating to 27% growth over the next two years. That means the company's valuation could cross $3 trillion sometime in 2027, with only a tiny amount of EPS growth required that year.
I think a mixture of a higher P/E ratio and higher EPS will catapult Alphabet into the $3 trillion club sometime in the next 12 to 18 months. The company's P/E is currently so low because it lost a lawsuit against the U.S. Department of Justice last year in which it was found guilty of monopolistic practices. The official punishment is expected to be handed down later this year.
The lawsuit was brought in 2020, at the tail end of President Donald Trump's first term, but he has returned to office with a very aggressive plan to slash regulation for businesses. When President Joe Biden was in the White House, the DOJ asked the judge to consider breaking Alphabet apart, which would hurt the company's earnings potential. However, on the campaign trail last year, Trump suggested he wasn't in favor of that outcome.
If the punishment amounts to a simple financial penalty instead (which sounds like the more probable outcome under Trump's DOJ), I think Alphabet's P/E ratio could soar from here and create a much easier path to the $3 trillion club.
