Will Google Stock Hit $3 Trillion

Alphabet has been on a persistent growth streak quarter after quarter, year after year for about as long as you can look back in time.

This most recent quarter signaled quite possibly a tectonic shift in fortunes for the company with margins dramatically expanding.

So what does the future hold for Alphabet and what does it mean for the firm’s ability to hit a $3 trillion valuation?

The Margin Story Cannot Be Overlooked

Operating margins are the clue to investors that things are going really, really well because they expanded by 400 basis points year-over-year to reach 32%.

Amazingly, this occurred while R&D investments climbed by 10.5% to $12.4 billion, hinting at structural rather than cyclical improvement in the business model.

Compared to both Apple and Microsoft at similar revenue scales, these margin hikes stand apart. Alphabet’s services segment now posts a 40.3% operating margin compared to Microsoft’s commercial cloud margin of 43% and Apple’s services margin of 70%.

What’s Driving Alphabet Revenues?

Alphabet’s revenue foundation rests on three primary pillars. Google Search revenue increased to $49.4 billion, representing 12.1% year-over-year growth at an astonishing 50%+ operating margin.

This growth came despite a reduction in traffic acquisition costs from 21.2% to 20.8% of revenue. The cost reduction translated to approximately $340 million to operating profit in the quarter, and marked the third consecutive quarter of cost improvement.

YouTube didn’t slack either with advertising revenue up to $8.9 billion, an 11.8% increase year-over-year. Non-advertising revenue, primarily from subscriptions, grew 62% to produce an additional estimated $2.1 billion.

Cost-per-impression popped up by 15% year-over-year while impressions declined 14%, and that suggests stronger monetization of premium inventory. YouTube’s operating margin now is getting awfully close to 30%, a dramatic improvement from 20% just two years ago.

The fastest-growing segment was Google Cloud with revenue soaring by 35% to $11.4 billion. Cloud’s contracted revenue backlog now stands at $86.8 billion, representing nearly two years of forward revenue at current run rates.

Better still, Cloud’s operating margin reached 17.2% in Q3, up from 3.2% a year ago, and translated to $1.9 billion in operating income compared to just $266 million in the prior year.

This margin expansion occurred while cloud infrastructure spending increased 80% year-over-year, indicating significant operating leverage in the model.

Extraordinary Profits Persist at Alphabet

Alphabet’s margin story reveals structural improvements in a host of areas. The consolidated operating margin climb to 32% suggests fundamental transformation is occurring within each business unit.

Google Services, the company’s largest segment, improved its operating margin to 40.3% in Q3, contributing $30.9 billion in operating income, a 29% year-over-year increase that points to how scalable the advertising technology stack really is.

The geographic margin profile translates to tremendous strength in developing markets. While U.S. operations maintain the highest margin at 45%, EMEA margins expanded 300 basis points to 38% in spite of currency headwinds from the Turkish lira and Brazilian real. APAC margins reached 35%, with India and Indonesia driving particular strength.

These widening international margins took place while revenue grew 12% in EMEA and 11% in APAC on a constant currency basis.

Cloud unit economics tell perhaps the most interesting margin story with dramatic margin improvement from 3.2% to 17.2% year-over-year coming from three factors.

First is customer cohort maturation where customers over $1 million in annual revenue grew by 42%, improved infrastructure utilization rates reaching 76%, and AI-driven service automation reducing customer support costs by 31%.

The average revenue per cloud customer increased 28% to $225,000, while customer acquisition costs fell by 15% to $47,000 and hinted at improving lifetime value metrics.

The AI Pivot Is Working Well

Management is clearly preparing for an AI-centric future. Research and development spending reached $12.4 billion in Q3, representing 14% of revenue. Within this, AI and machine learning investments represented approximately $7.2 billion, a 45% year-over-year increase.

The company added 2,105 AI researchers in the quarter, bringing its total AI-focused headcount to approximately 19,000.

The company’s data center footprint expanded to 38 regions globally, with five new regions under construction. The average data center now costs $2.1 billion to build, up from $1.4 billion year-over-year, emphasizing increased AI computing capacity.

Share repurchase is quite interesting too because the company repurchased $46.9 billion of shares in the first nine months of 2024, reducing shares outstanding by 2.4%.

With $59.7 billion remaining in repurchase authorization and operating cash flow of $86.2 billion in the same period, Alphabet maintains significant flexibility to both invest in growth and return capital to shareholders.

Cash Rich and an Eye On the Future

Alphabet’s balance sheet is nothing short of a fortress of strength, but the path to $3 trillion is more nuanced.

Cash and marketable securities stand at $93.2 billion while operating lease obligations total $17.1 billion with future lease commitments of $6.1 billion.

Working capital figures are looking better too with days sales outstanding falling to 67 from 71 year-over-year, while inventory turns increased to 14.8x from 13.2x.

Debt levels remain very much in check with $14.8 billion in total debt against $235.3 billion in stockholders’ equity. The weighted average interest rate on outstanding debt is 1.8%, with no major maturities until 2025.

Will GOOG Stock Hit $3 Trillion?

A combination of revenue growth, margin expansion, and multiple progression should lead to a $3 trillion market cap for GOOG shareholders.

At current revenue growth rates of 15% and assuming stable margins, Alphabet is likely to generate approximately $140 billion in operating income by 2026.

Applying Microsoft’s current multiple of 32x, versus Alphabet’s 27x, to this earnings stream would value the company at $2.8 trillion.

There is upside to this baseline calculation with cloud margins set to reach 25% by 2026 based on current growth rates, which would lead to an additional $8 billion in operating income.

AI monetization across search and YouTube has the potential to add another 200 basis points to overall margins, worth approximately $5 billion in incremental operating income.

The more likely path to $3 trillion involves a combination of these factors is 15% annual revenue growth, 100 basis points of annual margin expansion, and multiple expansion to 30x earnings by 2026. This scenario would put Alphabet’s market capitalization at $3.2 trillion by early 2027, suggesting a 36-month timeline to the milestone.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.