Will Alphabet Be Worth More Than Nvidia by 2025?

Alphabet's (GOOG 0.80%) (GOOGL 0.83%) stock has rallied by more than 40% over the past 12 months and is currently hovering near its all-time high. The tech giant impressed investors with the accelerating growth of its advertising and cloud businesses, a new $70 billion share buyback plan, and the approval of its first-ever dividend.

Those positive developments somewhat allayed investors concerns about Alphabet's slower progress in the artificial intelligence (AI) market relative to its peers, but it is still overshadowed by Nvidia, which rallied by more than 210% over the past 12 months as the market's demand for its AI accelerator chips outstripped its ability to supply them.

Image source: Getty Images.

Nvidia also surpassed Alphabet's market cap for the first time this year. As of this writing, Nvidia is worth $3.3 trillion while Alphabet is worth $2.2 trillion. But could Alphabet accelerate and overtake Nvidia again by the end of 2025?

Has Alphabet overcome its near-term challenges?

Alphabet generates most of its revenue from Google's advertising business, which includes its search and display ads, network ads, and YouTube. The rest of its revenue mainly comes from Google Cloud, the world's third-largest cloud infrastructure platform, as well as Google's subscription, platforms, and devices division.

Alphabet's revenue only rose 10% in 2022 as concerns about the macroeconomic outlook led many companies to rein in their marketing and cloud spending. The company also faced stiff competition from Meta Platforms and ByteDance in the advertising market, and it seemed to struggle against Amazon and Microsoft in the cloud market. But over the past year, all three of Alphabet's core businesses warmed up again.

Data source: Alphabet. YOY = Year-over-year.

Google's advertising business recovered as rising sales for YouTube and search-based ads offset declining ad network revenues. Its cloud growth accelerated as it rolled out over a thousand new products and features, and it continued to expand its Gemini generative AI platform.

Google's subscriptions, platforms, and devices segment also locked in more subscribers. As of the end of the first quarter of 2024, YouTube Premium and Music had reached 100 million global subscribers, YouTube TV hit 8 million subscribers, and Google One surpassed 100 million subscribers. Those expansions should widen the company's moat and reduce its dependence on ads.

Alphabet's outlook

Alphabet could benefit from several tailwinds over the next three years. The macroeconomic environment could improve as the Fed cuts interest rates, which would likely lead to companies spending more money on its ads and cloud services again. The ban of TikTok in the U.S., which will take effect next January unless ByteDance sells its U.S. subsidiary, could drive more users to YouTube.

But it also faces tough challenges. It's struggling to make headway in the generative AI space, where its offerings aren't as impressive as those of Microsoft and OpenAI. The upcoming launch of Apple's  generative AI ecosystem could reduce the amount of revenue Google earns from ads displayed to users of Apple devices -- even though Google pays Apple billions of dollars each year to remain its default search engine. Also, Alphabet still faces ongoing antitrust and privacy probes in the U.S., Europe, and other regions.

From 2023 to 2026, analysts expect Alphabet's revenue to grow at a compound annual rate of 11% as its EPS increases at a compound annual rate of 20%. Based on those estimates, which seem realistic relative to its past growth rates, its stock looks reasonably valued at 23 times forward earnings.

If Alphabet meets those expectations and trades at the same forward earnings multiple at the end of 2025, its stock price would have risen 30% to about $228, boosting its market cap to $2.9 trillion -- but that would still be below where Nvidia sits today. Nvidia will also likely keep growing as the AI chip market expands.

Let's not compare apples to oranges

Alphabet and Nvidia are both "Magnificent Seven" stocks, but they operate in different industries and have different business models. Alphabet is a top play on the digital advertising and cloud markets, while Nvidia is the leader in AI and gaming GPUs. So instead of wondering if Alphabet will become more valuable than Nvidia again, investors should focus on its macro, competitive, and regulatory challenges. If it resolves those issues, it should remain a solid long-term investment.