Google Cloud remains Alphabet's fastest-growing business

Alphabet generated a record $88.2 billion in revenue during the third quarter, which was a 15% increase from the year-ago period. Google Search accounted for $49.3 billion of that total, and it grew by 12.2%.

But Google Cloud was the standout performer once again. It generated record revenue of $11.3 billion, which was a 34.9% year-over-year jump, making it the fastest-growing piece of Alphabet's entire organization. It also marked the fourth-consecutive quarter of accelerating growth, and 34.9% was the highest quarterly growth rate in two years.

Developing AI models is extremely expensive. The average business can't build its own data center infrastructure because graphics processing units (GPUs) from suppliers like Nvidia cost up to $40,000 each, and thousands of them are often required for AI workloads. Alphabet -- through Google Cloud -- buys hundreds of thousands of those chips and clusters them in centralized data centers, and then rents the computing capacity to developers for a fee. That makes AI accessible to businesses of all sizes.

Google Cloud operates several data centers packed with Nvidia's GPUs, in addition to chips it designed in-house like the Trillium tensor processing unit (TPU). That mix of hardware helps differentiate its data center infrastructure from its competitors. Using a combination of GPUs and TPUs, one customer -- LG AI Research -- reduced inference processing time by 50% for its multimodal AI model through Google Cloud.

Most developers pay cloud providers for computing capacity by the minute, so faster processing can bring costs down substantially. Therefore, it's no surprise that LG AI has also achieved a 72% reduction in operating costs.

Businesses can also access over 130 ready-made large language models (LLMs) on Google Cloud, which they can use to accelerate the development of AI software. That includes Gemini and a host of LLMs from leading third-party developers like Meta Platforms. Alphabet says usage of Gemini through Google Cloud has grown by a staggering 14 times over the last six months alone.

Alphabet's (mathematical) path to the $3 trillion club

Alphabet delivered $2.12 in earnings per share during Q3, representing 36.7% growth compared to the year-ago period. The company's trailing-12-month earnings per share is now $7.54, and based on its current stock price of $179.52, that places it at a price-to-earnings (P/E) ratio of 23.8.

Alphabet is the cheapest stock in the trillion-dollar club by far. In fact, the other six trillion-dollar companies trade at an average P/E ratio of 40.9:

For Alphabet's P/E ratio to rise to 40.9, its stock would have to rise by 72% from where it currently trades. That would carry its market cap to $3.6 trillion, making it the most valuable company in the world. But even if Alphabet's P/E ratio rose to 32.3 to trade in line with the Nasdaq-100 technology index, that would take the company's market cap to over $2.8 trillion.

In that scenario, Alphabet would join the $3 trillion club next year based on its forecasted earnings growth of 13.5% alone (according to Wall Street's consensus compiled by Yahoo! Finance).

But why is Alphabet's P/E ratio so low?

The U.S. Department of Justice (DOJ) filed an antitrust lawsuit against Alphabet in 2020, alleging the company engaged in anticompetitive practices by paying Apple up to $20 billion per year to make Google the default search engine on devices like the iPhone. In August this year, the judge ruled in the DOJ's favor, which leaves Alphabet in a very uncertain position.

The potential consequences are wide-ranging. Alphabet could be hit with a simple financial penalty, or it might face new rules relating to how it operates – for example, paying companies like Apple to maintain market share in the internet search industry might be off the table in the future. However, the government could also force a complete breakup of Alphabet, which would require the conglomerate to sell certain parts of its business.

Many prominent technology analysts on Wall Street think a breakup is unlikely, but any punishment that erodes the dominance of Google Search could hurt Alphabet since that remains its largest source of revenue.

With all of that said, the court won't define Alphabet's punishment until next year. If it's a financial penalty, I think investors would swoop in and buy the stock, which could result in a P/E ratio that aligns with the Nasdaq-100. That would fast-track the company's membership into the $3 trillion club. If the punishment is more severe, the matter could be tied up in the courts for years as Alphabet submits appeals to challenge the ruling.

That's why, for now, I think Alphabet stock is a no-brainer buy at its current valuation. If the company is forced to break up -- which could be several years down the road -- investors can reevaluate their position at that time.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Meet the Unstoppable Stock That Could Join Apple, Nvidia, and Microsoft in the $3 Trillion Club Next Year was originally published by The Motley Fool