Nvidia shares are up over 180% since January 2024, and the stock accounted for almost a 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 lead the momentum in 2025.
Investments in AI infrastructure made in the past two years are positioning cloud computing companies to benefit as businesses turn AI prototypes into products this year. That leaves room for Amazon(NASDAQ: AMZN) a 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 suggests a share price of $338.
The alphabet is currently worth $2.4 trillion. The stock would need to return 46% for its market value to reach $3.5 trillion. That suggests a share price of $283.
Admittedly, both predictions are aggressive. But Bloomberg Intelligence estimates that productive AI spending will grow 71% in 2025, and Wall Street may be underestimating how much Amazon and Alphabet will benefit.
Amazon reported solid financial results in the third quarter, beating expectations on both the top and bottom lines. Revenue increased 11% to $159 billion on particularly strong sales growth in cloud services and advertising. Operating margin expand by 5 percentage points to 9.8%, and non-GAAP (generally accepted accounting principles) earnings increased 52% to $1.43 per diluted share. Analysts expected earnings to grow by 21%.
Amazon could continue to beat 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 the Alphabet combined. That scale is a key advantage. With more customers and partners, AWS is better positioned to take advantage of AI.
However, Amazon is also investing aggressively in AI product development. Its custom AI chips, Trainium and Inferentia, provide a cheaper alternative to Nvidia's graphics processing units (GPUs). Its bedrock platform enables developers to refine large pre-trained language models and build productive AI applications. And its conversational assistant, Amazon Q, helps programmers code, test and deploy software.
Wall Street estimates that Amazon's earnings will increase by 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 faster as demand for cloud AI services increases. In turn, that could justify a higher valuation and push the company's market value to $3.5 trillion.
For example, if Amazon's earnings grew 35% in the next four quarters and shares traded at 54 times earnings (below its peak of 62 times earnings in the past year), its share price would increase by 52% and its value would market reaches $ 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 reported encouraging financial results in the third quarter, beating estimates on both the top and bottom lines. Revenue increased 15% to $88 billion on particularly 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 cloud AI services increases. Google Cloud gained 2 percentage points of market share in the last year, while Microsoft lost 3 percentage points. And Google's investments in AI product development may keep that trend moving. Importantly, Google is the only company other than Amazon to use custom AI chips at scale, according to New Street Research.
More generally, Google has a strong position in several AI product categories. Forrester Research has recently recognized its leadership in AI infrastructure solutions, machine learning platforms, and large underlying language models. In one report, analyst Mike Gualtieri called Google the best-positioned hyperscaler for AI and said the company offers enough differentiation that it could win clients from other public clouds.
Wall Street estimates Alphabet's earnings will grow 14% in the next four quarters, which makes its current valuation of 26 times earnings look fair. But productive AI spending could lead to higher-than-consensus returns, and the valuation multiple could widen once investors have more clarity on the outcome of the antitrust case involving Google Search later this year.
Combined, those tailwinds could help Alphabet surpass Nvidia's current market value by the end of 2025. For example, if earnings grow 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.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of The Motley Fool's board of directors. Trevor Jennewine He has jobs at Amazon and Nvidia. The Motley Fool has jobs at Alphabet, Amazon, and Nvidia and recommends it. The Motley Fool has a disclosure policy.
