Alphabet has two key growth engines in digital advertising and cloud computing. It is the largest ad tech company in the world due to the popularity of Google Search and YouTube. And Google operates the third largest public cloud behind it Amazon And Microsoft. In both segments, the company relies on AI to create new monetization opportunities.

These efforts resulted in encouraging financial results in the third quarter. Revenue rose 15% to $88 billion, a sequential acceleration from 14% growth in the previous quarter. Operating margin increased 4 percentage points as the company continued to reshape its cost base, and GAAP net income rose 37% to $2.12 per diluted share.

Wall Street expects earnings to rise 15% over the next four quarters. This estimate, divided by the current valuation of 25 times earnings, yields a price-to-earnings-growth (PEG) ratio of 1.8. That’s a significant discount to Microsoft’s PEG ratio of 4, but I think the market will offer Alphabet a higher multiple once the company has more insight into regulatory issues.

More specifically, a federal judge ruled in August that Alphabet acted unlawfully to maintain its monopoly on Internet search, and the Justice Department wants Alphabet to sell its Chrome browser. That would almost certainly hurt its share of the search market, which likely explains the valuation differences between Alphabet and Microsoft. In other words, without regulatory issues, Alphabet could have a higher multiple.

However, Federal Judge Amit Mehta will rule on the remedy in August 2025, so the regulatory issues could potentially be resolved before the end of the year. Many analysts expect the solution to be less severe than what the Justice Department has proposed because (1) historical precedent makes a breakup unlikely and (2) the Justice Department under President-elect Donald Trump may propose a less extreme solution strives for.

In this scenario, I think the market could afford Alphabet a PEG ratio of 2.6. That implies a share price of $326 based on projected earnings of $8.96 per share in 2025, implying a market value of $4 trillion.

Many things would have to go right for Alphabet to reach this mark next year, but patient investors should feel comfortable buying a position today in any case.

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See 3 “Double Down” Stocks »

*Stock Advisor returns as of December 23, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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. Trevor Jennewine has positions at Amazon and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft and Nvidia. The Motley Fool recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.

Prediction: 2 AI Stocks Will Be Worth More Than Apple Stock by Year-End 2025 was originally published by The Motley Fool