With NVIDIA (NASDAQ:NVDA) briefly rising to a market cap of over $5 trillion late last year, the race is on to see which of the Magnificent Seven stocks will follow it. One of the promising candidates is Google parent company Alphabet (NASDAQ:GOOG, GOOGL), a dominant tech company that is increasingly benefiting from AI growth. Will the stock behind Google eventually reach the $5 trillion mark, and if so, how long will it take?
Alphabet’s Growth Catalysts
Like several of the Magnificent Seven, Alphabet has been a major beneficiary of the AI boom, especially where its cloud computing business segment is concerned. In Q4, Google Cloud revenue was up 48 percent compared to the year-ago quarter, rising to $17.7 billion. While cloud revenue still accounted for only a modest share of the $113.8 billion total revenue Alphabet generated during the quarter, its growth rate was far higher than the 18 percent consolidated revenue growth reported across Alphabet’s entire business. Much of this growth in cloud demand was driven by AI.
It’s important to remember, however, that Alphabet’s business is far from dependent on AI. To begin with, Alphabet is still the parent company of Google, a search engine with a global market share of 90 percent. The business also owns YouTube, the world’s largest video streaming platform. In Q4, Google search generated over $63 billion in revenue, while YouTube generated over $11 billion. In both cases, revenue was significantly higher than in the year-ago period, demonstrating that Alphabet is still generating respectable levels of growth from its core businesses.
Going forward, Alphabet expects to spend heavily on its AI infrastructure. This year alone, the company expects its CapEx to rise to between $175 billion and $185 billion, roughly doubling what it spent last year. Though such high levels of investment carry certain risks, Alphabet’s management has characterized the heavy spending as necessary to stay at the forefront of the AI race and drive further long-term growth.
In addition to AI, Alphabet is even continuing its research and development in the field of quantum computing, a potential long-term growth catalyst that could deliver large results several years from now. Although quantum computing likely won’t become a commercially viable technology until sometime in the 2030s, Alphabet’s early investment in research could help it stay ahead of potential startup competitors and take full advantage of the next generation of computing technology.
Overall, the growth picture for Alphabet looks quite positive for the foreseeable future. Core businesses like Google and YouTube are still growing decently and are kicking off enough cash flow to fund Alphabet’s investments in promising new technologies. This creates a multi-layered growth story in which large, established businesses generating more modest growth can make it possible for Alphabet to innovate in higher-growth areas. Google Cloud’s growth in Q4 represented a very good example of this dynamic, and it’s likely that ongoing AI demand will allow that business segment to keep beating Alphabet’s consolidated growth rate for quite some time to come.
Is Alphabet’s Current Valuation Reasonable?
While many tech stocks are trading at astronomical earnings multiples on expectations of future growth, Alphabet’s valuation looks quite a lot more reasonable. Shares of GOOG trade for 27.7 times trailing 12-month earnings, almost exactly lining up with the S&P 500 average of 27.9. Though the price-to-operating-cash-flow ratio is much higher at 48.3, Alphabet’s overall valuation looks fairly reasonable, especially in the context of modern tech stocks with significant AI exposure.
Analysts generally seem to believe that GOOG is undervalued at its current price, with the consensus price target of $359.53 representing an upside of 24.3 percent when compared to the most recent price of $289.20. Alphabet still has a fairly overwhelming buy rating, with 49 of the 56 analysts covering it rating it as a buy and no analysts issuing sell ratings.
Here, it’s also worth mentioning the fact that Alphabet has some fairly remarkable qualities as a business. Last year alone, the business generated free cash flows of over $73 billion and over $132 billion in net income. Alphabet also boasts a very strong trailing 12-month return on invested capital of 32.4 percent. As such, Alphabet currently appears to be an extremely high-quality business trading at what is likely a fair to somewhat undervalued price point.
Where Could Alphabet Go From Here?
Considering the fact that Alphabet currently has a market capitalization of $3.5 trillion, the upside forecast by analysts would see the business achieve a total value of over $4.3 trillion within the next 12 months. Though certainly short of the $5 trillion mark, this suggests that Alphabet’s rise toward that level is more a matter of when than a matter of if. Barring massive disruptions to Alphabet’s business or a fundamental rethinking of the value of AI on the part of the market, there seems to be relatively little on the horizon that would cause Alphabet to stop its long-term trend of positive compounding.
Looking a bit further down the line, analysts also expect to see Alphabet’s earnings per share grow at a compounded rate of around 15 percent annually during the next 3-5 years. Assuming Alphabet’s stock prices only advanced at the same rate and didn’t experience any P/E expansion, this could put the business at a market capitalization of $5 trillion within the next three years. By some estimates, Alphabet could go on to climb as high as $6 trillion by the year 2030.
Ultimately, it seems quite likely that Alphabet will cross the $5 trillion threshold sometime in the next 2-3 years, even without a major positive earnings surprise or a new growth catalyst to propel it forward more quickly. Alphabet has been a strong long-term compounding stock for investors to hold, and it seems likely that its growth will keep going for quite some time to come. Considering the fact that GOOG isn’t trading at a premium to the broader market at the moment, it could also be a decent value buy at its current prices.
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.