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Alphabet’s Journey to $3 Trillion Valuation

General Report January 9, 2025
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TABLE OF CONTENTS

  1. Summary
  2. Historical Context of Valuable Companies
  3. Alphabet's Current Valuation
  4. Revenue Generation and Market Share
  5. Advancements in Artificial Intelligence
  6. Financial Performance Analysis
  7. Future Considerations
  8. Conclusion

1. Summary

  • Alphabet Inc., the parent company of Google, is on the path to potentially joining the elite $3 trillion valuation club, alongside titans like Apple and Microsoft. With a current valuation of $2.3 trillion, Alphabet leverages its dominant market position and innovative strategies to drive growth. The report delves into Alphabet's robust revenue generation capabilities, with Google Search commanding a 91% market share and contributing significantly to its impressive $307.4 billion revenue in 2023. Advancements in artificial intelligence, such as the AI Overviews and Gemini models, underscore Alphabet's strategic pivot towards integrating AI more deeply into its operations and services, further enhancing its competitive edge. The report highlights the company's methodical growth trajectory, powered by strong revenue drivers such as YouTube and Google Cloud, which have both shown remarkable growth in recent quarters. Furthermore, Alphabet's share repurchase program and lower-than-average P/E ratio suggest potential undervaluation, making it an attractive prospect for investors anticipating its inclusion in the $3 trillion club.

2. Historical Context of Valuable Companies

  • 2-1. Overview of the U.S. economy's history in producing valuable companies

  • The U.S. economy has a century-long history of generating some of the world's most valuable companies. For instance, United States Steel became the first company in the world to reach a $1 billion valuation in 1901. General Motors capitalized on the automotive manufacturing boom to achieve a $10 billion valuation in 1955. In 1995, General Electric became the largest company with a $100 billion valuation by selling a broad spectrum of products ranging from plane engines to household appliances. More recently, Apple achieved a $1 trillion valuation in 2018, driven by the phenomenal success of its flagship products like the iPhone. Following Apple's ascent, other technology giants including Microsoft, Nvidia, Amazon, Meta Platforms, and Alphabet have joined the ranks of the trillion-dollar club.

  • 2-2. Significant milestones in corporate valuations

  • Key milestones in the valuation of corporate entities have marked the evolution of the U.S. economy. Notably, Apple, Microsoft, and Nvidia have reached the ultra-exclusive $3 trillion valuation level, a feat achieved by very few companies. Alphabet, the technology conglomerate behind important assets such as Google, YouTube, Waymo, and DeepMind, has been acknowledged as a potential contender to join this elite group, especially as it continues to innovate in the fast-growing artificial intelligence sector. Currently valued at approximately $2.3 trillion, Alphabet is seen as poised for further market valuation increases, should it successfully leverage its existing assets and continue its strategic growth trajectory.

3. Alphabet's Current Valuation

  • 3-1. Current Valuation of Alphabet and Comparison with Other Tech Giants

  • As of now, Alphabet Inc. is valued at $2.3 trillion. This valuation places Alphabet among the world’s highest-valued companies, alongside other tech giants such as Apple, Microsoft, and Nvidia, which have all reached the ultra-exclusive $3 trillion valuation level. Alphabet's valuation is currently less than the average price-to-earnings (P/E) ratio of 50.2 shared by its peers in the $3 trillion club, making it more attractive to investors from a relative valuation perspective. Alphabet’s P/E ratio is 28.3, which is lower than the 32.7 P/E ratio of the Nasdaq-100 index, suggesting it is undervalued relative to the broader tech sector.

  • 3-2. Potential Growth to $3 Trillion Based on Market Conditions

  • The analysis highlights that Alphabet could potentially reach a $3 trillion valuation within the next 18 months, primarily driven by earnings growth rather than an increase in its valuation multiple. It is expected that Alphabet will generate earnings of $8.61 per share in 2025. To maintain its current P/E ratio of 28.3, Alphabet’s stock would need to appreciate by 32%. This calculation indicates a feasible pathway for Alphabet to enter the $3 trillion valuation club, contingent upon favorable market conditions, such as an improvement in advertising spending and continued growth in revenue streams, especially from its core services like Google Search, YouTube, and Google Cloud.

4. Revenue Generation and Market Share

  • 4-1. Revenue sources: Google Search, YouTube, and Google Cloud

  • Alphabet Inc. generates over half of its revenue from Google Search, which holds a 91% market share in the internet search industry. Recent reports indicate that Alphabet's revenue in the past year reached a record $307.4 billion, with significant contributions from its core services. Specifically, in the first quarter of 2024, Google Search revenue saw a year-over-year increase of 14.3%, marking the fastest growth rate in almost two years. Additionally, YouTube demonstrated strong growth with its revenue accelerating to 20.8% during the same period. Google Cloud, noted for being the fastest-growing segment of Alphabet's business, achieved an impressive 28.4% increase in sales.

  • 4-2. Market share analysis of Google Search

  • Google Search has long been recognized as the dominant force in the internet search sector, commanding a market share of 91%. This dominance provides Alphabet with a substantial competitive advantage, capitalizing on the vast amounts of data that it can leverage to improve its AI capabilities. The introduction of AI Overviews in Google Search has further enhanced its role, providing users with text-based responses at the top of search results, which has resulted in higher click-through rates for reference links compared to traditional results. This strategic move may contribute to increased advertising revenue, reinforcing Google's position in the market.

5. Advancements in Artificial Intelligence

  • 5-1. Development and impact of AI technologies at Alphabet

  • Alphabet has positioned itself as a leader in the fast-growing artificial intelligence (AI) space, contributing significantly to its potential valuation increase towards the $3 trillion mark. The company generates more than half of its revenue from Google Search, which boasts a 91% market share. However, the emergence of AI chatbots like ChatGPT presents a competitive threat, as they provide a more direct and instant means of information access. In response, Alphabet launched its own AI chatbot named Bard, which has evolved into a family of multimodal models called Gemini, capable of interpreting and producing text, images, videos, and computer code. Furthermore, Alphabet has enhanced its traditional Google Search experience by introducing AI Overviews—text-based responses that appear at the top of search results. These innovations not only enhance user experience but also drive more clicks to reference links, potentially increasing advertising revenue and addressing concerns about Google losing its market dominance.

  • 5-2. Introduction of AI Overviews and the Gemini models

  • The Gemini models introduced by Alphabet represent a significant advancement in the company's AI capabilities. These models are designed to assist Google Workspace users by improving productivity across applications such as Google Docs, Sheets, and Gmail through an additional monthly subscription. Additionally, developers can access the Gemini models via Google Cloud, enabling them to build their own AI applications cost-effectively. This empowers businesses to leverage sophisticated AI capabilities without the heavy investment typically required to create large language models from scratch. Overall, the introduction of AI Overviews and the Gemini models marks a transformative shift for Alphabet, enhancing its core services and creating new revenue streams through innovative AI technologies.

6. Financial Performance Analysis

  • 6-1. Revenue growth trends from 2019 to 2023

  • Alphabet's revenue grew at a compound annual rate of 13.7% from 2019 to 2023, culminating in a record revenue of $307.4 billion in 2023. In Q1 2024, Alphabet recorded a revenue increase of 15% year-over-year, with Google Search revenue rising by 14.3%, marking the fastest rate of growth in nearly two years. Additionally, YouTube revenues surged by 20.8%, and Google Cloud demonstrated substantial growth with sales jumping by 28.4%. These increases were supported by improved market conditions following a downturn in the advertising industry during 2022 and 2023, and forecast interest rate cuts by the U.S. Federal Reserve may further enhance growth expectations.

  • 6-2. Earnings per share and price-to-earnings (P/E) ratio analysis

  • Over the last four quarters, Alphabet generated earnings per share (EPS) of $6.52. The company's current stock price stands at $185.01, resulting in a P/E ratio of 28.3, which is lower than the Nasdaq-100 index's average P/E ratio of 32.7. This indicates that Alphabet may be undervalued relative to its tech sector peers. While the average P/E ratio of the existing $3 trillion companies is 50.2, should Alphabet's P/E ratio align more closely with that of Apple and Microsoft, approximately 37.6, it could approach a $3 trillion valuation. Furthermore, analysts expect Alphabet to achieve an EPS of $8.61 in 2025, suggesting the stock must rise 32% to reach the valuation of $3 trillion without any changes in its P/E ratio.

7. Future Considerations

  • 7-1. Market conditions affecting Alphabet's growth

  • The U.S. economy has a history of producing some of the world’s most valuable companies, and Alphabet Inc. is positioned within this landscape. Alphabet generates more than half of its revenue from Google Search, maintaining a 91% market share in the internet search industry. However, recent developments in artificial intelligence, particularly the rise of AI chatbots, may influence this revenue stream. Companies like Microsoft have formed partnerships to enhance their search capabilities using AI, which could pose competition to Alphabet. Despite this, Alphabet possesses extensive data that can be harnessed for AI models, potentially allowing it to maintain its dominance.

  • 7-2. Share repurchase program and its implications

  • Alphabet recently expanded its share repurchase program by $70 billion, allowing the company to buy back its own shares periodically. This move reflects Alphabet's strategy to return value to its shareholders and may also signal confidence in its business prospects. The company's earnings per share over the last four quarters stand at $6.52, while its current stock price is $185.01, leading to a price-to-earnings (P/E) ratio of 28.3. This valuation is lower than the average P/E ratio of 50.2 for the current members of the $3 trillion club, suggesting that Alphabet's stock could be undervalued, and the share buybacks could enhance shareholder returns by reducing the number of shares outstanding.

Conclusion

  • Alphabet Inc.'s prospects of attaining a $3 trillion valuation hinge on its robust revenue streams and strategic advancements in artificial intelligence, which are pivotal in maintaining and potentially expanding its market position. With Google Search's commanding market share and significant contributions from YouTube and Google Cloud, Alphabet demonstrates a solid foundation for continued financial growth. The introduction of AI Overviews and the Gemini models marks a transformative shift, allowing Alphabet not only to retain its market dominance but also to offer innovative solutions to businesses and individual users. Despite competitive threats, notably from AI-powered initiatives such as ChatGPT, Alphabet's historical performance and strategic initiatives offer a promising outlook. However, its future trajectory will depend heavily on macroeconomic factors, advertising spending trends, and investor sentiment. The expanded share repurchase program reflects confidence in its valuation, potentially augmenting shareholder returns. While challenges remain, particularly around maintaining competitive leadership against technologically advanced rivals, Alphabet’s ongoing innovation and market strategy place it in a strong position to achieve its ambitious valuation goal. Future developments will require continuous adaptation and investment in emerging technologies to sustain long-term growth and shareholder value. These dynamics set a framework for strategic focus, ensuring Alphabet's relevance and leadership in the evolving tech landscape.

Glossary

  • Alphabet Inc. [Company]: Alphabet Inc. is the parent company of Google and several other subsidiaries, recognized as a leader in technology and innovation. With a significant market share in the internet search industry and ongoing advancements in artificial intelligence, Alphabet plays a crucial role in shaping the digital landscape and has the potential to reach a $3 trillion valuation.

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