No publicly traded company has ever reached a market valuation of $6 trillion. However, that should happen over the next few years, and several major corporations aren’t all that far from this milestone.
One company that could be in this group is Alphabet (GOOG +3.82%) (GOOGL +4.02%), the parent company of Google. Here’s why.
The business is strong
First, note that this feat wouldn’t require Alphabet to produce extraordinary returns. The company’s current market cap is $3.7 trillion. To reach $6 trillion in four years, it needs a compound annual growth rate of 12.85%. That is above the market’s long-term average, but it isn’t an unreasonable target, either.
Image source: Getty Images.
Second, we can point to Alphabet’s momentum. The company’s core advertising business remains strong and has been improved thanks to artificial intelligence (AI) initiatives. It has increased engagement on Google Search through features like AI Mode and AI Overviews, and has done likewise on YouTube through AI-powered recommendation algorithms.
This has helped grow ad revenue. In the fourth quarter, ad sales jumped by 18% year over year to $113.8 billion, a strong performance for the tech leader.
Third, we can look at the company’s most important growth driver, its cloud business. During the fourth quarter, cloud revenue soared 47.8% year over year. Its AI services are playing a prominent role here, and demand remains high. Alphabet ended the period with a cloud backlog of $247 billion, increasing 55% sequentially and by more than 100% year over year.
Strong demand for cloud and AI services could power Alphabet’s growth over the next four years, helping it deliver consistently strong financial results and sending its market cap above $6 trillion.
Potential challenges
Alphabet’s shares dropped after its fourth-quarter earnings report, largely because some investors worry about the company’s runaway capital expenditures. If this investment isn’t backed by strong revenue increases in the upcoming quarters, the stock will fall even more, especially as the shares look much more expensive — valuation-wise — than they did six months ago. The business is also facing a very competitive landscape in cloud computing.
Its advertising business could decline as economic problems arise, and companies decrease ad spending. It’s important to keep all these challenges in mind because they could hinder growth in the next four years.
Even so, management has shown the ability to overcome similar challenges. It can also cut spending, as it has in the past, if the spending doesn’t deliver the return on investment it expects or if economic challenges arise. A lot could happen over the next four years, but even if Alphabet fails to reach $6 trillion by 2030, the company still looks like an excellent buy-and-hold in the long term.