There are currently only three S&P 500 stocks in the $3 trillion club: Nvidia (NVDA 1.40%), Microsoft (MSFT +0.63%), and Apple (AAPL 0.87%). All three are valued right around $3.3 trillion. With a market cap of just under $2.2 trillion, Alphabet (GOOGL 0.30%) (GOOG 0.20%) looks like the best candidate to join this exclusive club. The stock would need to rise just over 36% to get there.
NVDA Market Cap data by YCharts
Let's look at three reasons why Alphabet looks poised to be the next stock to join the $3 trillion club.
1. Alphabet companies maintain dominant market positions
Alphabet is the dominant leader in search with Google having an approximate 90% global market share. Search is a huge business that is still growing robustly, with Google search revenue up 14% year over year in the first quarter this year to $46.2 billion. While Microsoft has tried to challenge Google's dominance by adding new artificial intelligence (AI) features to its Bing search engine, so far this has not made a dent in Google's dominance.
At the same time, YouTube is also a video content leader with one of the most attractive models in the space. Given its user-generated content, the company doesn't have to pay the large upfront content fees of streaming services, instead sharing revenue with its creators. Despite a lackluster advertising market, YouTube's first-quarter revenue jumped 21% year over year to $8.1 billion. The company is just starting to better monetize its short-form videos, which is competing with the likes of ByteDance's TikTok and has a long runway to keep growing.
Meanwhile, Google's fastest-growing segment is its cloud service business, which grew its revenue 28% year over year to $9.6 billion in Q1. Google Cloud holds the No. 3 position in market share for cloud services (behind 2. Microsoft's Azure and 1. Amazon Web Services) and the business has been a beneficiary of increased AI spending in the broader economy. As a business with a lot of fixed costs, Google Cloud just became profitable in 2023 and is now set to grow its profitability more quickly than revenue as the segment shows operating leverage.
NASDAQ: GOOGL
Key Data Points
2. Alphabet is seeing an AI upside
While Google Cloud has already been a big beneficiary of the increased interest in all things AI, other parts of its business are also benefitting. The company is incorporating its Gemini large language model (LLM) into various products including its Pixel smartphones and Workspace product suite. Gemini for Workspace, for example, will start as a $20-a-month add-on subscription built into Gmail, Docs, and Sheets that will act as an AI assistant that can do such tasks as monitor and track projects, organize information, help write proposals, and generate images and designs.
While the company has scaled back its use of AI search overlays for the time being due to some early flubs, it still represents a future opportunity. Google currently only serves ads for about 20% of its searches where the inclusion of ads is relevant to the search, so new ad forms for AI searches will be a big potential opportunity. The technology still needs to improve, but AI and AI-powered search are still very much in their infancy.
3. Alphabet is an undervalued stock
Compared to the stocks already in the $3 trillion club, Alphabet trades at the lowest valuation by far with a forward price-to-earnings (P/E) ratio of just over 23. Given its current growth and future prospects, the stock currently looks very undervalued.
GOOGL PE Ratio (Forward) data by YCharts
If Alphabet traded at the same 32.5 forward P/E multiple as Apple, its Class A shares would cost $245 and it would have a market cap of $3 trillion. Notably, Alphabet has been showing stronger revenue growth than Apple. In their most recent quarters, Apple saw its revenue decline 4% year over year, while Alphabet grew revenue 15%. Thus, it looks like it should only be a matter of time before Alphabet stock joins the $3 trillion club.
Overall, Alphabet is an undervalued stock with dominant market positions and strong growth prospects ahead. The stock looks like a solid buy for long-term investors at current levels.
