Nvidia has reached unprecedented heights, becoming the only stock ever to surpass the $4 trillion mark. As the company continues to dominate the technology market, many are left pondering the next significant milestone: which corporation will be the first to achieve a $5 trillion valuation. With the landscape of megacap stocks continually evolving, the competition is fierce.
Alphabet Inc. (NASDAQ: GOOG, NASDAQ: GOOGL) currently holds the fourth position among the largest companies globally with a market cap of $2.8 trillion. Despite this substantial number, some analysts argue that Alphabet is significantly undervalued. Considering its robust foundations in innovative technologies and artificial intelligence (AI), Alphabet is poised for growth that might catapult it to the $5 trillion mark, if the market begins to recognize its true worth.
Why should investors pay attention to Alphabet? As one of the key players in the tech industry, there are multiple compelling reasons to consider adding this stock to your portfolio.
Initially, the narrative surrounding Alphabet’s place in AI seemed bleak. Critics pointed fingers, claiming that Alphabet was lagging behind competitors like OpenAI and Microsoft. However, the landscape shifted as Alphabet introduced its own leading generative AI model, Gemini, which has begun to redefine its position in the AI arms race.
Another concern for investors has been the evolution of Google Search, Alphabet’s primary revenue stream. There’s been a pervasive fear that generative AI might disrupt its dominance. Yet, defying expectations, Google Search captured a 12% revenue increase in the second quarter. The company adapted by integrating AI-driven summaries at the top of search results, blending traditional search capabilities with the cutting-edge AI experience.
Far from being a singular success, Alphabet has found various ways to leverage AI across its offerings.
One of its fastest-growing sectors is Google Cloud, which has seen skyrocketing demand as businesses shift toward cloud-based AI workloads. Renting computing power from providers like Google Cloud has proven to be a more economical strategy than developing in-house data centers. Companies previously seen as competitors, including OpenAI and Meta Platforms, have turned to Google Cloud for their AI needs.
In Q2, Google Cloud generated $13.6 billion in revenue, reflecting a remarkable 32% year-over-year growth. Operating margins also improved significantly, rising from 11% to 21%. While still a smaller fraction of Alphabet’s overall business, projections suggest that Google Cloud could evolve into a major revenue driver as demand for cloud services continues to rise through this decade.
Despite these achievements, there is still strong sentiment that Alphabet’s stock remains undervalued—a factor that could accelerate its journey toward a $5 trillion market cap. Achieving this goal would necessitate an approximate 80% increase in market valuation over the next five years, a challenge that seems more feasible given its current trajectory.
One way Alphabet can boost its valuation is by aligning more closely with its peers. Currently, the company trades around 21.5 times its forward earnings. In comparison, similar tech giants are trading at price-to-earnings multiples in the upper 20s to low 30s, while the S&P 500 hovers around 24 times. This differential indicates that Alphabet has significant room for price appreciation, particularly in light of its solid earnings growth—diluted earnings per share (EPS) increased by 22% year over year last quarter.
If Alphabet can maintain a 15% earnings growth rate over the next five years and elevate its valuation to 25 times forward earnings, it has the potential to more than double its value, easily putting it in the vicinity of a $6 trillion market cap.
The scope for Alphabet to be a lucrative investment remains significant as it adopts more innovative strategies and benefits from increasing demand in the tech sector. Investors are encouraged to consider this tech titan as a promising stock, especially while it’s still seen as trading at a discount.
However, potential buyers should remain informed and weigh their options carefully. Although Alphabet has great prospects, it’s essential to note that other stocks may also present compelling opportunities for growth. For instance, analyst reports from the Motley Fool Stock Advisor recently highlighted ten top stocks for investors—Alphabet was not among them, underscoring the competitive landscape in the market.
As you navigate your investment strategy, recognize that stocks like Nvidia have previously made significant leaps after being featured in analyst recommendations. Such considerations can be pivotal, helping investors make informed choices in a constantly shifting economic landscape.
