This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Nvidia shares have surged over 180% since January 2024, and the stock accounted for nearly one-quarter of the gains in the S&P 500 (SNPINDEX: ^GSPC) during that period. The company is now worth $3.4 trillion and should continue to benefit from the artificial intelligence (AI) boom for many years to come. But public clouds may take the momentum lead in 2025.
Investments in AI infrastructure made in the last two years position cloud computing companies to benefit as businesses turn AI prototypes into products this year. That leaves room for Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) to surpass Nvidia's current market value before the end of 2025:
- Amazon is currently worth $2.3 trillion. The stock would need to return 52% for its market value to reach $3.5 trillion. That implies a share price of $338.
- Alphabet is currently worth $2.4 trillion. The stock would need to return 46% for its market value to reach $3.5 trillion. That implies a share price of $283.
Admittedly, both predictions are aggressive. But Bloomberg Intelligence estimates generative AI spending will grow 71% in 2025, and Wall Street may be underestimating how much Amazon and Alphabet will benefit.
Amazon: 52% upside required to attain a $3.5 trillion market value
Amazon reported solid financial results in the third quarter, beating expectations on the top and bottom lines. Revenue increased 11% to $159 billion on especially strong sales growth in cloud and advertising services. Operating margin expanded 5 percentage points to 9.8%, and non-GAAP (generally accepted accounting principles) earnings soared 52% to $1.43 per diluted share. Analysts expected earnings to grow 21%.
Amazon could continue to exceed estimates as artificial intelligence (AI) spending increases. Amazon Web Services (AWS) accounted for 31% of public cloud services spending in the third quarter, nearly as much as the 33% market share Microsoft and Alphabet had combined. That scale is a key advantage. With more customers and partners, AWS is better positioned to monetise AI.
However, Amazon is also investing aggressively in AI product development. Its custom AI chips, Trainium and Inferentia, provide a cheaper alternative to Nvidia graphics processing units (GPUs). Its Bedrock platform enables developers to fine-tune pretrained large language models and build generative AI applications. And its conversational assistant, Amazon Q, helps programmers code, test, and deploy software.
Wall Street estimates Amazon's earnings will increase 26% over the next four quarters. That consensus makes the current valuation of 47 times earnings look very reasonable. But the company's earnings could grow more quickly as demand for cloud AI services increases. In turn, that may justify a higher valuation and push the company's market value to $3.5 trillion.
For instance, if Amazon's earnings grow 35% in the next four quarters and shares trade at 54 times earnings (below its peak of 62 times earnings in the past year), its share price would increase 52% and its market value would reach $3.5 trillion. However, Amazon is a worthwhile long-term investment even if the company fails to surpass Nvidia's current market value by the end of 2025.
Alphabet: 46% upside required to attain a $3.5 trillion market value
Alphabet reported encouraging financial results in the third quarter, beating estimates on the top and bottom lines. Revenue increased 15% to $88 billion on especially strong sales growth in Google Cloud and modest growth in Google services (advertising). Meanwhile, GAAP net income increased 37% to $2.12 per diluted share. Analysts expected earnings to grow 19%.
Alphabet may continue to top estimates as demand for AI cloud services increases. Google Cloud gained 2 percentage points of market share in the past year, while Microsoft lost 3 percentage points. And Google's investments in AI product development may keep that trend in motion. Importantly, Google is the only company besides Amazon to deploy custom AI chips at scale, according to New Street Research.
More broadly, Google has a strong position in several AI product categories. Forrester Research recently recognised its leadership in AI infrastructure solutions, machine learning platforms, and foundational large language models. In one report, analyst Mike Gualtieri called Google the hyperscaler best positioned for AI and said the company offers enough differentiation that it may win clients from other public clouds.
Wall Street estimates Alphabet's earnings will increase 14% in the next four quarters, which makes its current valuation of 26 times earnings look fair. But generative AI spending could lead to above-consensus earnings, and the valuation multiple could expand once investors have more clarity on the outcome of the antitrust case involving Google Search later this year.
Collectively, those tailwinds could help Alphabet surpass Nvidia's current market value by the end of 2025. For instance, if earnings increase 25% over the next four quarters and the stock trades at 30 times earnings when that period ends, its share price would advance 46% and the company would be worth $3.5 trillion. However, Alphabet is a worthwhile long-term investment, even if my prediction doesn't pan out.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
