Prediction: These Will Be the Next $5 Trillion Companies

Nvidia (NASDAQ: NVDA) is back to being a $5 trillion company. It's the only company ever to achieve this feat, but I think three other stocks are likely to follow in its footsteps soon: Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), and Amazon (NASDAQ: AMZN).

So, why will these three get there soon? Simple: They all have booming cloud computing divisions.

Image source: Getty Images.

Alphabet, Microsoft, and Amazon have one business segment in common

Usually, Alphabet, Microsoft, and Amazon aren't mentioned as direct competitors. Alphabet is primarily thought of as an advertising business due to the large share of its revenue coming from Google ads and YouTube. Microsoft's primary business is business productivity tools, and Amazon's e-commerce site is its main revenue driver.

All those statements are true, but those simple pictures leave out the fastest-growing business at each of those companies: cloud computing.

The cloud computing space has been one of the biggest beneficiaries of the ongoing artificial intelligence (AI) build-out. The business model is simple: build massive data centers and rent out access to their computing power online.

For this business to work, the cloud provider must charge more for access to computing power than it takes to build the infrastructure, replace the computing units as they wear out, and power and operate the data centers. That's it. All three companies have mastered this business model and are following it profitably.

Even without the AI tailwind, cloud computing was doing well, as more companies migrated from on-premises servers to the cloud. However, AI has poured gasoline on the fire. Few AI software firms have the resources and expertise necessary to put up their own data centers, so they rent access from smaller neocloud companies or hyperscalers like Alphabet's Google Cloud, Microsoft's Azure, and Amazon Web Services (AWS). Each of these three sees the massive AI demand, which is why they are spending hundreds of billions of dollars annually to build more capacity.

In his recent letter to shareholders, Amazon CEO Andy Jassy pointed out that the nature of the cloud computing business requires the company to spend even more on data centers as its growth rate accelerates. The investments that Amazon is making now will have several years of payoff, and years down the road, these major investments will be huge for each company. That's true for every competitor in the cloud computing arena, and will provide the financial tailwind that drives these three to market caps above $5 trillion.

How long will it be until they reach $5 trillion?

Alphabet is already relatively close to the $5 trillion target. From its current $4.2 trillion market cap, it needs to rise less than 20% to get there. Microsoft, hovering around $3.2 trillion, and Amazon, valued at a little less at $2.8 trillion, have further to climb.

Microsoft, though, should eventually get a boost thanks to its currently low valuation compared to its sub-$5 trillion peers.

MSFT PE Ratio (Forward) data by YCharts.

If Microsoft traded around 30 times forward earnings like its peers, that would provide a boost of more than 17% to its share price, and bring it's market cap to around $3.8 trillion. From there, it would only require a few years' worth of strong cloud growth to drive it to the $5 trillion mark.

Amazon is a bit further out, and it doesn't have a valuation discount to recover from, but it doesn't need it. While the majority of Amazon's revenue comes from its e-commerce business, AWS actually generates most of the profits.

During Q4, AWS accounted for 50% of the company's operating income. In Q3, that figure was 66%. With AWS's revenue growth accelerating in recent quarters, I think it will only be a couple of years before Amazon has grown enough to warrant a $5 trillion market cap without having an artificially high valuation.

Keithen Drury has positions in Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.