Apple (AAPL 2.21%) became the first company to reach a $1 trillion market cap about seven years ago. Since then, the biggest tech companies in the world have only grown bigger and wielded even more influence over the stock market.
Apple touched a $3 trillion market cap in early 2022 just ahead of the market downturn. It has since been joined (and surpassed) in the $3 trillion club by Microsoft and Nvidia.
The newer members have seen their fortunes rise on the back of growing demand for artificial intelligence (AI). Nvidia designs leading-edge graphics processing units (GPUs), which are essential for AI training and inference. Microsoft is one of Nvidia's biggest customers, outfitting its huge data centers with GPU servers and renting capacity to AI developers, including generative AI leader OpenAI.
This month, another AI stock joined the $3 trillion club, but it could easily climb even higher over the next few years. Here's what investors need to know.
Image source: Getty Images.
Say hello to the newest member of the $3 trillion club
On Sept. 15, Alphabet (GOOG +2.11%) (GOOGL +1.82%) entered the $3 trillion club after its shares received a boost from news about a friendly court ruling.
After the courts ruled that Alphabet violated antitrust law with its Google search engine and its stranglehold over the search advertising market, the company faced potential remedies that could have significantly hurt its earnings and operations. Some speculated that it would have to divest its Chrome web browser or Android operating system. Others thought the court might bar it from making revenue-sharing deals with other web browser owners that make it the default search engine.
But when the judge made his remedies ruling earlier this month, it was far more lenient: no required divestitures, and Alphabet could continue making deals as a default search engine as long as it didn't require exclusivity.
Not only was the ruling a boon for Alphabet's stock, it also meant Apple could hold on to a key component of its services business. Alphabet's biggest contract is with Apple, which makes Google the default search engine across its billions of devices (where legal). That nets Apple $20 billion per year in fees, which practically all goes toward its bottom line.
More importantly, the ruling lifts a huge overhang for the stock prices of both companies. And while Alphabet shares have already climbed substantially higher, they could continue climbing from here due to multiple factors.
What could drive the company to a $4 trillion market cap?
Alphabet's stock was weighed down by the potential remedies it faced, but that's not the only thing impeding the stock. Many fear that growing competition from AI chatbots like ChatGPT or Perplexity will eat into Google's market share. In fact, that was one of the main reasons the judge didn't come down harder on Alphabet.
NASDAQ: GOOG
Key Data Points
But the impact of those search alternatives has yet to show up in Alphabet's financial results. Its Google search revenue accelerated last quarter, growing 12% year over year. And with AI features like its Overviews, Circle to Search, and Google Lens driving increased traffic and monetizing at high rates, that trend could continue as the company expands those features.
On top of that, AI is driving considerable growth for Alphabet's cloud computing business. It surpassed a $50 billion run rate in the second quarter, and its operating margin expanded to 21%. Operating margin could expand as Alphabet scales up its operations. Amazon, for example, has an operating margin for its cloud computing business of 37% over the last 12 months.
Alphabet's Other Bets could provide another catalyst for the stock. Specifically, its Waymo self-driving car business has made significant progress in expanding operations over the last two years, and its progress could accelerate over the next few years. It recently announced plans to enter Nashville, its 12th major market, and is testing its service in six other markets, including New York and Tokyo.
But here's what could be the biggest factor driving Alphabet to $4 trillion: multiple expansion. Even after the price appreciation that pushed the company's value above $3 trillion, the stock currently trades for just 25.7 times forward earnings estimates. Meanwhile, the other members of the $3 trillion club all trade for an average earnings multiple above 35.
If Alphabet's multiple expands to just 29 times forward earnings by the end of next year, the company will be worth well over $4 trillion based on current estimates for 2027 earnings.
