Big tech stocks produced some of the biggest gains in the current bull market, which dates back to October 2022.
Nvidia, already an industry giant with a market cap around $300 billion at the start of the bull market has seen its value climb more than 14-fold in just a few years to become the first $4 trillion company. That growth was driven by massive spending on artificial intelligence and investor excitement about the potential AI developments could unlock for businesses for years to come.
But Nvidia won't remain the sole member of the $4 trillion club for long. Recent developments lifted a massive overhang sitting on two tech giants that may have prevented investors from fully valuing their potential. Both have artificial intelligence to thank for the positive impact on their businesses, but not in the way you might think. Without as much potential for negative developments, both companies have a clear path to $4 trillion valuations.
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A massive court victory for these two tech partners
In August 2024, Alphabet (GOOG 0.72%) (GOOGL 0.33%) was found to have violated the Sherman Act, operating an illegal monopoly for internet search. Many investors worried about the remedies the federal court would require from Google. Potential rulings thrown around were the required divestment of its Chrome web browser or a ban on revenue sharing deals with other web browser companies.
The latter had the potential to massively disrupt Apple's (AAPL +0.73%) services segment. Alphabet pays the iPhone maker in excess of $20 billion a year in revenue sharing for making Google the default search engine for its Safari browser across its devices. Almost all of that goes to Apple's bottom line.
The ruling arrived on Sept. 2, with the remedies being much more lenient than feared. Google can still make revenue-sharing deals like it has with Apple, as long as contracts don't exclude the other party from making similar deals in other regions with other search engines or exclude pre-installing certain apps. The same terms would extend to any deals for AI apps like Google's Gemini. Google will also have to share some search data, such as what users click on.
Ironically, the judge said the rise of AI influenced his ruling. Many have seen the rise of AI chatbots like ChatGPT and Perplexity as threats to Alphabet's main Google Search business. And the judge appears to agree.
Shares of both Alphabet and Apple rallied on the news, but that rally may just be getting started, and the partnership between the two giants may be about to get even deeper.
NASDAQ: GOOG
Key Data Points
Artificial intelligence saved them, now it could send them higher
Alphabet has a lot to gain from the continued development and adoption of artificial intelligence. While chatbots like ChatGPT and Perplexity may be threats to search traffic, the growth of developers looking to use artificial intelligence services in the cloud have been a boon to Google Cloud. Apple notably used Alphabet's custom tensor processing units (TPUs) to train its Apple Intelligence models, and OpenAI recently signed a deal to use Google's chips for inference.
Alphabet's cloud business saw sales soar 32% in the most recent quarter, with its operating margin expanding to 21%. Management said it expects to remain supply constrained into 2026, as it builds out data centers as quickly as possible. That bodes well for continued revenue growth and margin expansion from here.
Whether Apple continues to pursue its own AI strategy, partnering with Google cloud for training, remains to be seen. The companies are reportedly discussing a partnership where Apple uses Alphabet's Gemini LLM to underpin key AI features in future updates of iOS and Siri. That may gain some traction after Apple's entire September product presentation barely made mention of any new AI features.
Such a partnership could be a win-win. Alphabet will receive a ton of revenue, and in exchange, Apple will be able to integrate more powerful AI features customers have been waiting for since last summer's Apple Intelligence announcement. More AI features in the iPhone could unlock opportunities for premium services or opportunities for developers to use more AI features built on Apple's AI framework with privacy protections in mind. Both could boost Apple's services revenue. Not to mention, it could push more users to upgrade their iPhones.
NASDAQ: AAPL
Key Data Points
In the meantime, the threat of AI chatbots has failed to make a dent in Alphabet's revenue from Google Search. Revenue from the search engine climbed 12% last quarter, accelerating from the previous quarter's 10% gain. Management says AI-powered features like Overviews in search results, Circle to Search, and Google Lens have all increased search volume with no negative impact on monetization rates. As a revenue-share partner, Apple can benefit from higher search revenue as well.
It won't take much to push Apple to a $4 trillion market cap. The company nearly cleared the bar last December. After the recent rally, shares sit 16% short of the threshold. Even modest earnings growth will push Apple to the $4 trillion level in a couple of years without any valuation multiple expansion.
Alphabet is now approaching a $3 trillion valuation. Sitting about 38% shy of the $4 trillion benchmark, its growth will come from multiple sources. Continued improvement in Search engagement and monetization combined with higher margins on its cloud business will be the core of that growth. Alphabet also has opportunities with Gemini (its large language model), Waymo (its self-driving car business), and quantum computing. Without the overhang of the antitrust ruling, the stock could see its earnings multiple expand closer to other members of the "Magnificent Seven," as it sports a forward price-to-earnings ratio of just 24 right now. As a result, it could quickly climb to that $4 trillion level on the back of strong earnings and investor sentiment.
