American stock exchanges are home to nine technology companies with valuations of $1 trillion or more, but only three have graduated into the $3 trillion club so far:
- Apple: $3.6 trillion.
- Nvidia: $3.4 trillion.
- Microsoft: $3.1 trillion.
Alphabet (GOOG -1.11%) (GOOGL -1.07%) is the world's fourth-largest company, with a market capitalization of almost $2.4 trillion as of this writing. Its stock soared by more than 35% during 2024, and it's currently trading at a record high.
Alphabet has become a leader in artificial intelligence (AI), and it's embedding the technology across many of its legacy businesses including Google Search. Below, I'm going to explain why the company has a clear path to joining the exclusive $3 trillion club in 2025.
Image source: Alphabet.
AI could transform Google Search
When OpenAI's ChatGPT application went mainstream in 2023, it offered an entirely new way to access information online. Alphabet investors were concerned because Google Search is the conglomerate's primary source of revenue, and its 90% market share in the internet search industry was suddenly under threat.
Alphabet launched a decisive response, which culminated in a family of its own AI models called Gemini (with a chatbot of the same name). The company also overhauled the traditional Google Search experience by presenting AI-generated answers to queries which appear above the usual results. This feature saves users from sifting through web pages to find the information they need.
Alphabet also went a step further recently when it launched AI Overviews for Google Search. They incorporate text, images, and links to third-party websites to provide more complete answers to users' queries. The company discovered that links within Overviews receive more clicks than had they appeared in traditional search results, so this new format could drive significant revenue as it gathers momentum.
Overviews recently rolled out to more than 100 new countries where they will reach 1 billion users every month, and they might be the secret to protecting Google's dominant market share in the search industry.
Google Cloud is growing rapidly, thanks to AI
The advertising dollars generated by Google Search accounted for $49.3 billion of Alphabet's $88.2 billion in total revenue during the third quarter of 2024 (ended Sept. 30). Google Cloud, on the other hand, contributed just $11.3 billion -- however, that figure represented growth of 34.9% compared to the year-ago period, whereas the search business generated growth of just 12.2%.
Q3 also marked the fourth consecutive quarter in which Google Cloud's revenue growth accelerated, and AI was a big part of the reason. The platform is a go-to destination for developers seeking the tools to build AI software, whether it's data center computing infrastructure or ready-made large language models (LLMs) like Gemini.
Google Cloud operates several data centers filled with Nvidia's industry-leading graphics processors (GPUs), which are the most popular chips for AI workloads. However, Google also designed its own chips like the Trillium tensor processing unit (TPU). Offering a mix of hardware helps Google Cloud differentiate itself from the competition, but designing chips in-house also unlocks a level of customization which can reduce costs and drive efficiency.
On the software side, businesses can access more than 130 ready-made LLMs through Google Cloud, which they can use to accelerate the development of AI applications. In a series of prepared remarks for Q3, Alphabet said the usage of Gemini alone soared by 14 times over the prior six-month period.
Alphabet has a mathematical path to the $3 trillion club
Alphabet has generated $7.54 in trailing 12-month earnings per share (EPS), which places its stock at a price-to-earnings (P/E) ratio of just 25.7. As you can see by the below chart, it's significantly cheaper than each of the $3 trillion giants I mentioned at the top, which trade at an average P/E ratio of 43.3:
There are two ways Alphabet could join the $3 trillion club in 2025: Multiple expansion (a higher P/E ratio), or good-old-fashioned earnings growth.
If Alphabet's P/E ratio rises to 43.3, it would translate into a 68% increase in its stock price from where it currently trades. That alone would make it a $4 trillion company, without any additional earnings growth! Even if Alphabet's P/E ratio rose to 35 (equivalent to Microsoft, the cheapest $3 trillion stock), its market cap would jump to $3.2 trillion.
But what if its P/E ratio remained the same, and the company relied on earnings growth alone?
Wall Street's consensus forecast (provided by Yahoo) suggests Alphabet will generate $8.99 in EPS this year, which places its stock at a forward P/E ratio of 21.6. It implies the stock will have to climb by 19% before the end of the year just to maintain its current P/E ratio of 25.7, which would be enough to lift its market cap to $2.85 trillion. So it still needs some multiple expansion.
Why is Alphabet's P/E ratio so low?
In 2020, the U.S. Department of Justice (DOJ) sued Alphabet for engaging in anticompetitive behaviour. The lawsuit referenced the large payments Alphabet makes every year to partners including Apple, in exchange for making Google the default search engine on devices like the iPhone. In August 2024, the judge ruled in the DOJ's favor which left Alphabet in an uncertain position.
The court won't define Alphabet's punishment until later this year. It could impose a financial penalty, which would be a positive for shareholders, or it could force the company to stop paying partners like Apple, which would erode Google's market share. The DOJ actually wants Alphabet to sell its Chrome internet browser (which uses Google by default) to help restore some competitiveness to the search industry.
If any of the more severe remedies are imposed, this case could be tied up in the courts for years as Alphabet appeals the decision. However, the DOJ is likely to be overhauled once the Trump administration takes office on Jan. 20.
Trump will bring a business-friendly policy agenda to the White House, which includes significant deregulation. He even made some specific comments on the campaign trail last year which suggested he doesn't want to see Alphabet's business broken up. Personally, I think the odds of a financial settlement are now extremely high, which will be a massive win for the company.
If the Trump administration pulls Alphabet out of the regulatory fire, its P/E ratio is likely to jump several points as investors cheer the removal of a significant risk. Combined with the company's projected earnings growth, I think it has a great shot to join the $3 trillion club in 2025.
