The tech giant lost nearly 20% of its value after it hit the $2 trillion mark two years ago.
Alphabet's (GOOG 1.82%) (GOOGL 1.79%) market cap briefly hit $2 trillion in November 2021, less than two years after it reached the $1 trillion mark in January 2020. Alphabet had impressed investors with the robust growth of its advertising and cloud businesses, and the buying frenzy in growth stocks amplified those gains.
But today Alphabet has a market cap of $1.6 trillion. The bulls retreated as the macro headwinds curbed the company's growth and rising rates compressed its valuations. Could this tech giant become a $2 trillion company again by 2025?
The mathematical path toward a $2 trillion valuation
Alphabet's stock would need to rise nearly 30% by the end of 2025 for its market cap to hit $2 trillion. Analysts expect it to grow its revenue at a modest compound annual growth rate (CAGR) of 10% from $283 billion in 2022 to $378 billion in 2025. If it's still trading at 5 times sales by 2025, its market cap would rise to $1.9 trillion.
If Alphabet grows just a little faster or attracts a higher price-to-sales ratio, its market cap could top $2 trillion by the end of 2025. That's certainly possible considering that Alphabet traded at 8 times sales back in November 2021.
Alphabet's main strengths and weaknesses
Alphabet still generates most of its revenue from Google's advertising business, which suffered a slowdown throughout 2022 as inflation, rising interest rates, and other macro headwinds drove many companies to rein in their marketing expenses. To offset that slowdown, Google aggressively expanded YouTube's subscription-based services.
As the following table illustrates, Google's advertising growth accelerated again this year as themacro environment stabilized. At the same time, Google's "other" revenue generated high double-digit growth as YouTube locked in more paid subscribers. As a result, the company's total revenue growth accelerated over the past three quarters.
Metric | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | Q3 2023 |
|---|---|---|---|---|---|
Google Advertising Revenue Growth (YOY) | 3% | (4%) | 0% | 3% | 9% |
Google Other Revenue Growth (YOY) | 2% | 8% | 9% | 24% | 21% |
Google Cloud Revenue Growth (YOY) | 38% | 32% | 28% | 28% | 22% |
Total Revenue Growth (YOY) | 6% | 1% | 3% | 7% | 11% |
Data source: Alphabet. YOY = Year over year.
But here's the bad news: Google Cloud's growth decelerated significantly in the third quarter as it faced tougher macro and competitive headwinds. By comparison, Microsoft -- which controls a much larger slice of the cloud market than Google -- grew its "Azure and other cloud services" revenue 29% year over year in its latest quarter, which actually represented an acceleration from its 26% growth in the previous quarter.
It's never a good sign when an underdog is growing slower than the market leader, and Microsoft's superior growth suggests its ongoing investments in OpenAI -- which supported its integration of ChatGPT into Azure, its other cloud services, and its Bing search engine -- is widening its lead against Google in the cloud race.
On the bright side, Google Cloud's operating margins have stayed positive for three consecutive quarters as it reined in its spending. Those improvements, along with its rising Google Service margins, boosted its total operating margins over the past year. Analysts expect its EPS to grow at a CAGR of 20% from 2022 to 2025.
It could generate steady growth through 2025
Alphabet's near-term growth is stabilizing, but it still faces long-term challenges. The rise of generative AI platforms like ChatGPT could challenge its online search engine, new antitrust probes in the U.S. and Europe could result in more restrictions, and fresh macro headwinds could curb the growth of its advertising and cloud businesses.
Yet Alphabet has already overcome plenty of competitive, regulatory, and macro headwinds since its public debut in 2004. If it continues to strengthen its own ecosystem with new artificial intelligence (AI) features, more efficient ad products, more cloud features, and additional subscription plans, it should grow at a stable clip through 2025.
Therefore, I believe Alphabet has a clear path toward reaching a $2 trillion valuation. But as always, investors should focus on Alphabet's underlying business instead of fretting too much over its market cap milestones.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool has a disclosure policy.
