There are currently only three S&P500 stocks in the $3 trillion club: Nvidia (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT)And Apple (NASDAQ:AAPL). All three are valued at around $3.3 trillion. With a market capitalization of just under $2.2 trillion, Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) seems to be the best candidate to join this exclusive club. The stock would need to rise a little more than 36% to get there.
Let’s look at three reasons why Alphabet appears 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 the search industry, with Google holding around 90% of the global market share. Search is a huge business that continues to grow robustly, with Google search revenue up 14% year-over-year in the first quarter of this year, to $46.2 billion. While Microsoft has attempted to challenge Google’s dominance by adding new artificial intelligence (AI) features to its Bing search engine, so far this has not dented Google’s dominance.
At the same time, YouTube is also a leader in video content with one of the most attractive models in the industry. Given its user-generated content, the company does not have to pay the high upfront content fees of streaming services, but instead shares its revenue with its creators. Despite a sluggish 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 rival ByteDance’s TikTok and have a long way to go to continue growing.
Meanwhile, the fastest growing segment of Google is cloud service business, which grew its revenue 28% year over year to $9.6 billion in the first quarter. Google Cloud ranks third in terms of market share for cloud services (behind 2. Microsoft’s Azure and 1. Amazon Web Services) and the company has benefited from increased AI spending in the broader economy. As a company with many fixed costs, Google Cloud just became profitable in 2023 and is now poised to grow profitability faster than revenue as the segment shows operating leverage.
2. Alphabet sees the benefits of AI
While Google Cloud has already been a big beneficiary of the growing interest in all things AI, other areas of its business are benefiting as well. The company integrates its Gemini Wide Language Model (LLM) into various products, including its Pixel smartphones and Workspace suite of products. Gemini for Workspace, for example, will start as a $20 per month add-on subscription integrated with Gmail, Docs and Sheets that will act as an AI assistant capable of performing tasks such as monitoring and tracking projects, organizing information, help. write proposals and generate images and designs.
Although the company has reduced its use of AI search overlays for now due to some early errors, this still represents a future opportunity. Google currently only shows ads for about 20% of its searches where the inclusion of ads is relevant to the search. New ad forms for AI-powered searches will therefore be a big potential opportunity. The technology still needs to improve, but AI and AI-based research are still in their infancy.
3. Alphabet is an undervalued stock
Compared to stocks already in the $3 trillion club, Alphabet trades at by far the lowest valuation with a forward price-to-earnings (P/E) ratio of just over 23. Given its current growth and future prospects, the stock currently appears very undervalued.
If Alphabet traded at the same forward P/E multiple of 32.5 as Apple, its Class A shares would cost $245 and its market cap would be $3 trillion. Notably, Alphabet posted stronger revenue growth than Apple. In the most recent quarters, Apple saw revenue decline 4% year-over-year, while Alphabet grew revenue 15%. So it seems like it’s only 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. The stock appears to be a solid buy for long-term investors at current levels.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Geoffrey Seiler holds positions at Alphabet. The Motley Fool holds positions and recommends Alphabet, Amazon, Apple, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
This undervalued stock could join Nvidia in the $3 trillion club was originally published by The Motley Fool
