Tech Stocks on Fire: Why Alphabet is Poised to Lead the Charge in 2025
The tech sector has been on a tear, with the Nasdaq-100 index delivering a remarkable 55% total return in 2023 and 27.5% so far in 2024. This momentum is expected to continue, with historical data suggesting that strong years in the Nasdaq index are often followed by even more impressive gains.
Alphabet: The AI Leader of the Future
In 2023 and 2024, Nvidia was the star of the tech stock show. However, I believe Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is poised to take the lead in 2025, driven by its artificial intelligence (AI) expertise. When OpenAI’s ChatGPT went viral in late 2022, investors in Alphabet got nervous, but the company has since risen to the challenge, copying OpenAI’s products, innovating in Google Search, and retaining its market share.
Extending its AI Lead
Recent announcements from Alphabet include an AI video generator, quantum computing chips, and the expansion of Waymo’s self-driving car unit to new cities. The company is now extending its lead in AI commercialization, which will help drive business growth. More search queries will lead to increased revenue at Google Search, which accounts for around 74% of the company’s overall revenue.
Google Cloud: A Key Growth Driver
The cloud-infrastructure business, Google Cloud, hit $11.35 billion in revenue last quarter, with profit margins inflecting higher. Alphabet’s AI expertise allows it to sell computing, storage, and software tools to third-party companies, and as spending on AI grows, a significant portion of it will be funneled to Google Cloud’s data centers. I believe there is a clear path to $100 billion in Google Cloud revenue within a few years, with profit margins potentially reaching 25%.
Attractive Valuation and Growth Prospects
Despite Alphabet stock’s recovery, it still looks like an attractive buy at current valuation levels. The stock has a trailing price-to-earnings (P/E) ratio of 25, which is well below the S&P 500 average of 30. Alphabet’s revenue is growing 15% year over year and should continue to grow at a double-digit rate if the company can maintain and extend its lead in AI. Management is simultaneously investing in AI and returning more cash to shareholders through share repurchases and dividends.
A Compelling Investment Opportunity
In summary, Alphabet trades at a discounted P/E to the broad market and should keep growing revenue at a double-digit rate for the next few years. Plus, it has a management team returning capital to shareholders. This is the holy trinity of stock market outperformance, making Alphabet a good bet for investors to buy and hold in 2025.
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