AlphabetIt is (NASDAQ:GOOG) (NASDAQ:GOOGL) The stock is up more than 40% in the past 12 months and is currently near its all-time high. The tech giant has impressed investors with accelerated growth in its advertising and cloud businesses, a new $70 billion stock buyback plan and the approval of its first-ever dividend.
These positive developments have somewhat assuaged investors’ concerns about Alphabet’s slower progress in the area of ​​artificial intelligence (AI) market relative to its peers, but it remains overshadowed by Nvidiawhich has grown more than 210% in the past 12 months as market demand for its AI accelerator chips outpaces its ability to supply them.
Nvidia also surpassed Alphabet’s market capitalization 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 short-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 comes primarily from Google Cloud, the world’s third-largest cloud infrastructure platform, as well as Google’s subscriptions, platforms and devices division.
Alphabet’s revenue grew just 10% in 2022 as concerns about the macroeconomic outlook led many companies to limit their marketing and cloud spending. The company also faced strong competition from Metaplatforms and ByteDance in the advertising market, and it seemed to struggle against Amazon And Microsoft in the cloud market. But over the past year, Alphabet’s three core businesses have heated up again.
Metric | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | Q1 2024 |
|---|---|---|---|---|---|
Google Ad Revenue Growth (YOY) | 0% | 3% | 9% | 11% | 13% |
Google Subscription, Platform and Device (YOY) Revenue Growth | 9% | 24% | 21% | 23% | 18% |
Google Cloud Revenue Growth (YOY) | 28% | 28% | 22% | 26% | 28% |
Total revenue growth (YOY) | 3% | 7% | 11% | 13% | 15% |
Data source: Alphabet. YOY = Year after year.
Google’s advertising business recovered as rising sales from YouTube and search advertising offset declining ad network revenue. Its growth in the cloud accelerated with the deployment of more than a thousand new products and features, and the company continued to develop its Gemini generative AI platform.
Google’s subscription, platform and device segment also attracted more subscribers. By the end of the first quarter of 2024, YouTube Premium and Music had reached 100 million subscribers worldwide, YouTube TV had reached 8 million subscribers, and Google One had exceeded 100 million subscribers. These expansions are expected to widen the company’s moat and reduce its reliance on advertising.
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 companies to spend more money on its ads and cloud services again. THE TikTok ban in the United States, which will take effect next January unless ByteDance sells its American subsidiary, could attract more users to YouTube.
But it also faces significant challenges. It has struggled to make headway in the generative AI space, where its offerings are not as impressive as those from Microsoft and OpenAI. The upcoming launch of AppleGoogle’s generative AI ecosystem could reduce the amount of revenue Google makes from ads displayed to users of Apple devices – even though Google pays Apple billions of dollars each year to remain its default search engine. Additionally, Alphabet continues to face antitrust and privacy investigations in the United States, Europe and other regions.
From 2023 to 2026, analysts expect Alphabet’s revenue to grow at a compound annual rate of 11% while its EPS will grow at a compound annual rate of 20%. Based on these estimates, which seem realistic given its past growth rates, its stock appears reasonably valued at 23 times forward earnings.
If Alphabet met these expectations and traded at the same forward earnings multiple at the end of 2025, its stock price would have increased 30% to around $228, bringing its market capitalization to $2.9 trillion – but this figure would still be lower than Nvidia’s today. . Nvidia will also likely continue to grow 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 major player in the digital advertising and cloud markets, while Nvidia is the leader in GPUs for AI and gaming. So instead of wondering whether Alphabet will become more valuable than Nvidia again, investors should focus on its macroeconomic, competitive, and regulatory challenges. If it fixes these issues, it should remain a solid long-term investment.
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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. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Leo Sun holds positions on Amazon, Apple and Meta Platforms. The Motley Fool holds positions and recommends Alphabet, Amazon, Apple, Meta Platforms, 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 Mad Motley has a disclosure policy.
Will Alphabet be worth more than Nvidia by 2025? was originally published by The Motley Fool
