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Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) reported third-quarter earnings on Oct. 28. Since then, the stock sold off and hasn't recovered. It was down more than 10% since reporting earnings, which is no small amount considering that Alphabet is one of the world's largest companies.
However, Alphabet's sell-off was more focused on its spending rather than its growth. I think this is a very short-sighted view by the market, and it's why Alphabet stock should be considered a strong buy right now.
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If the company keeps up the pace, a $5,000 investment could be worth $11,000 by 2030. Here's how.
Alphabet's business was built on Google Search. However, a new segment is starting to lead the company: cloud computing. Google Cloud is one of the largest cloud computing firms in the world and could start closing the gap, due to how fast it's growing.
In Q3, its revenue rose 103% year over year to $30.7 billion. Amazon Web Services (AWS) is the industry leader and generated $46 billion in Q3, growing at 39%. So, Google Cloud has a chance to start catching up to Amazon over the next year, but not all of its revenue is recurring.
For the most part, cloud computing revenue can be recognized as recurring, as clients pay for usage, which is generally fairly recurring revenue. However, Alphabet is starting to sell its proprietary artificial intelligence computing chips to certain firms, which is boosting its revenue.
Unfortunately, Alphabet doesn't provide investors with Tensor Processing Unit sales figures, so it's impossible to parse how much revenue is from chip sales and how much is from a more recurring revenue stream. The best clue investors have is that Alphabet stated that cloud revenue makes up the "vast majority" of revenue and that the growth rate, excluding TPU sales, was "incredibly strong." However, 2027 will include far more chip sales, which could affect the 2027 revenue guidance investors may see during Q4.
However, the legacy business wasn't the greatest for Alphabet. Google Search had an OK quarter, with revenue growing 12% year over year. YouTube didn't fare any better, with revenue rising 9% year over year. But Alphabet's total revenue rose at a 25% year-over-year rate, thanks to the strength of Google Cloud, which now makes up nearly a quarter of its total business.
But where will that take the stock by 2030? Let's take a look.
Many in the cloud computing industry project several years of strong growth driven by rising AI workloads. Google Cloud's peers are growing at a 40% rate, but with Google Cloud's TPUs becoming a popular alternative to GPUs for running workloads, I think it will grow faster than its peers, growing at a 50% rate. This will help boost Alphabet's overall growth rate, and a 20% companywide growth rate from now until 2030 isn't out of the question. If Alphabet does that, it could have trailing 12-month revenue totals of just over $1 trillion.
Trillion-dollar revenue companies are quickly approaching, and Alphabet will be among the first to reach this mark. If it can deliver a 30% profit margin and trade for 25 times earnings, that would value the stock at $7.7 trillion. Alphabet currently has a $3.5 trillion valuation, so this would transform a $5,000 investment today into about $11,000.
That's a great, market-beating investment, and investors should use today's sale price as a smart buying opportunity for Alphabet stock.
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Keithen Drury has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool has a disclosure policy.
Alphabet's Cloud Business Doubled, but the Stock Plunged. Here's What a $5,000 Investment Could Be Worth by 2030. was originally published by The Motley Fool
