Alphabet Stock Poised to Reach $2 Trillion Valuation as Google Cloud Powers Growth
Alphabet, the parent company of Google, is set to make its mark in the trillion-dollar club. While Apple has been making headlines with its $3 trillion valuation and speculation swirls about which company will be the next to join the $1 trillion market cap club, Alphabet has positioned itself as a strong candidate to reach the rarefied $2 trillion club. With a current valuation of $1.65 trillion, Alphabet needs a 20% increase to achieve this milestone. But when will it happen? Let’s dive in.
Alphabet, known for its revolutionary Google search engine, has been a dominant force in shaping how we navigate the internet. Despite facing competition from chatbot-powered search engines, Google remains the go-to choice for users and continues to enhance its chatbot search capabilities. Moreover, Alphabet boasts a sleeper revenue giant in the form of YouTube, which commands the highest screen time among streaming services in the U.S. With YouTube only growing by 4.5% in the second quarter, there’s substantial room for revenue expansion.
However, the most exhilarating prospect lies in Alphabet’s Google Cloud division. As the company’s cloud computing service, Google Cloud plays a crucial role in enabling businesses to leverage Alphabet’s data centers for the processing of massive amounts of data to fuel machine learning (ML) and artificial intelligence (AI) models. In Q2, Google Cloud’s revenue skyrocketed by 28% compared to the previous year, outpacing its big three competitors in cloud computing. What’s more, Google Cloud achieved a remarkable turnaround in profitability, shifting from a loss of $590 million last year to a profit of $395 million this year. Its operating margin rose from 2.6% in Q1 to 4.9% in Q2, reflecting its increasing financial strength.
The future holds enormous growth potential for Google Cloud, as market researcher Mordor Intelligence predicts that the cloud computing market will experience a compound annual growth rate of 16.4% and reach a staggering $1.24 trillion market opportunity by 2028, compared to its current valuation of $580 billion.
The rise of generative AI adds further fuel to Google Cloud’s growth. Over 70% of generative AI unicorns (private companies valued at over $1 billion) are already customers of Google Cloud, highlighting its status as the preferred choice for AI-driven startups.
Considering Alphabet’s well-rounded portfolio of divisions and the imminent growth catalyst of Google Cloud, it comes as no surprise that the company’s stock appears primed for a $2 trillion valuation. But when can investors expect this milestone?
Historically, Alphabet’s stock has traded within the high-20s price-to-earnings (P/E) ratio range for the past decade. While the current P/E ratio of 27.5 times earnings might suggest fair valuation, a closer look at Alphabet’s forward earnings reveals an attractive proposition for tech investors. Forward earnings take into account projections, and with Alphabet’s advertising revenue expected to rebound due to economic improvements, the stock is projected to reach a 28 times trailing earnings valuation within a year. This would result in a 22% return for investors, coinciding with the 20% increase necessary for Alphabet to achieve a $2 trillion market cap.
Based on this analysis, it is reasonable to expect Alphabet to realize a $2 trillion valuation sometime in 2024. However, the bigger takeaway is the potential for Alphabet’s stock price to grow over 20% within a year. Such market outperformance is a rarity, making Alphabet an enticing investment opportunity. Additionally, with YouTube’s continuous market share dominance and the ongoing growth of its cloud computing division, Alphabet promises to be an excellent long-term investment.
As Alphabet continues its journey, we eagerly await its ascent to the $2 trillion club, driven by the combination of its established divisions, innovative offerings, and promising growth prospects.