Alphabet is the fifth-largest company in the world with a market cap of $2 trillion, and it has reached this position thanks to its dominance in the global search engine market, a fast-growing cloud computing business, and its strong share in the digital advertising market.
The tech giant is now deploying artificial intelligence (AI) tools across its key businesses to ensure that it can maintain healthy levels of growth in the long run. Alphabet's AI investments seem to be bearing fruit.
The company's Google Cloud revenue increased 28% year over year in the first quarter, along with robust growth in other segments. Alphabet's new AI-powered search and advertising tools are also gaining momentum, suggesting that the company could be at the beginning of a strong growth curve.
However, there's another tech giant that has delivered stronger returns than Alphabet over the past three years and is making the most of the fast-growing adoption of AI within the digital ad space. Let's take a closer look at this name and check why it could overtake Alphabet's market cap over the next three years.
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Meta Platforms has outperformed Alphabet, and that trend could continue
Meta Platforms(NASDAQ: META) stock has delivered impressive gains of 181% in the past three years, easily outpacing the 40% jump in Alphabet during this period. Meta stock's stronger jump can be attributed to the faster growth in the company's top and bottom lines.
Its latest results indicate that it could keep growing faster than Alphabet over the next three years as well. The social media giant's revenue increased 16% year over year in the first quarter, 4 percentage points faster than Alphabet during the same quarter. Meta's adjusted earnings jumped 37% year over year in the first quarter to $6.43 per share, exceeding the 20% increase for Alphabet (after excluding $8 billion in unrealized gains from a nonmarketable equity investment in a private company).
Meta Platforms benefited from an increase in its user base, a jump in the number of ad impressions delivered, and strong growth in the average price per ad. Specifically, the company ended the quarter with 3.43 billion daily active users across its family of apps.
Meanwhile, the integration of AI-powered ad tools helped it record a 5% increase in the number of ad impressions delivered and a 10% jump in the average price per ad. The average price per ad was up by 6% in the same quarter last year.
CEO Mark Zuckerberg said on the company's latest earnings conference call that its AI-enabled ad tools are gaining traction among advertisers because of their ability to increase returns on ad dollars spent. The company's AI-powered content recommendation is driving an increase in engagement on its Facebook, Instagram, and Threads platforms.
According to Zuckerberg:
AI has already made us better at targeting and finding the audiences that will be interested in their product than many businesses are themselves, and that keeps improving. And now, AI is generating better creative options for many businesses as well. I think that this is really redefining what advertising is into an AI agent that delivers measurable business results at scale.
He said he believes that advertising could contribute a bigger share to the global economy in the long run thanks to improved productivity enabled by AI. As it turns out, his company thinks that it can rake in somewhere between $460 billion to $1.4 trillion in revenue from generative AI by 2035. That's going to be a significant jump over the $2 billion to $3 billion in revenue that Meta expects to pull in from its generative AI products in 2025.
Analysts are expecting Meta to generate $186.5 billion in revenue in 2025, which means that there is a lot of room for growth in its top line over the next decade thanks to AI. So the company has decided to increase its investments in AI infrastructure this year. It has bumped up its 2025 capital expenditure (capex) guidance to a range of $64 billion to $72 billion, up from the earlier estimate of $60 billion to $65 billion.
Zuckerberg says that its increased capex in 2025 will go toward supporting "both generative AI and core business needs." This is a smart move from a long-term perspective considering the huge end-market revenue opportunity that Meta sees in AI over the next decade.
Stronger earnings growth could help Meta become a bigger company than Alphabet
Meta is the seventh-largest company in the world with a market cap of $1.5 trillion. This puts it behind Alphabet, which currently has a 33% bigger market cap right now. However, Meta can bridge that gap in the next three years by delivering a stronger jump in earnings, which is evident from the chart below.
For comparison, Alphabet's earnings are expected to jump almost 7% next year followed by a 14% increase in 2027. Assuming Meta's earnings increase to $32.90 per share in 2027 and it trades at 28 times earnings at that time, in line with the Nasdaq-100's earnings multiple (using the index as a proxy for tech stocks), its stock price could jump to $954. That would be a 60% increase from current levels.
So, there is a good chance that Meta's solid earnings growth could translate into healthy gains on the market over the next three years. The stock is currently trading at 23 times earnings, so investors can buy it at a discount when compared to the broader index. Moreover, the faster growth in Meta's earnings could lead the market to reward it with a premium valuation, which could be enough to help this "Magnificent Seven" stock become a bigger company than Alphabet.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.
