4. Alphabet Inc. (NASDAQ:GOOG)
Number of Hedge Fund Investors: 165
Market Capitalization: 1.94T
Jim Cramer notes that Alphabet Inc. (NASDAQ:GOOG)’s recent concerns about not making acquisitions are driven by the fear of Meta Platforms, Inc. (NASDAQ:META) potentially surpassing them. According to Cramer, Alphabet Inc. (NASDAQ:GOOG)’s hesitation is rooted in a specific worry: that Meta Platforms, Inc. (NASDAQ:META) could catch up and overtake Google in the competitive landscape.
“Google isn’t buying because they’re worried that the other guys might do something. They’re specifically worried that Meta is going to catch and pass them and they should be.”
Alphabet Inc. (NASDAQ:GOOG)’s latest earnings report reveals a strong financial performance, with revenue reaching $84.7 billion, a 14% increase from the previous year. This growth was fueled by exceptional results in its key areas, such as Search and Cloud. Alphabet Inc. (NASDAQ:GOOG)’s operating income surged to $27.4 billion, while net income climbed to $23.6 billion, showcasing significant improvement. The Search business was particularly successful, contributing $73.9 billion in revenue, and YouTube advertising grew by 13% to $8.66 billion.
Additionally, the Cloud segment performed remarkably well, with revenue increasing by 28.8% to $10.35 billion and achieving over $1 billion in quarterly operating profit for the first time. Alphabet Inc. (NASDAQ:GOOG)’s commitment to investing in artificial intelligence (AI) enhances its growth prospects. Alphabet Inc. (NASDAQ:GOOG)’s focus on advancing AI within its Search and Cloud services is expected to yield substantial returns as AI becomes more widely adopted across various sectors. While there are some challenges in its Network ads segment, Alphabet Inc. (NASDAQ:GOOG)’s strong performance in Search, Cloud, and AI positions it well for ongoing growth and profitability.
Baron Fifth Avenue Growth Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q2 2024 investor letter:
“We also added to Alphabet Inc. (NASDAQ:GOOG). The company reported solid financial results with first quarter revenue growth of 15% year-over-year, driven by 14% growth in search, 21% growth in YouTube, and 28% growth in cloud (which accelerated from 26% growth in the fourth quarter). The company has also increased its cost discipline efforts, which drove operating margins to 31.6% (compared to 25% in the first quarter of 2023). With regards to GenAI, while we are cognizant of the potential risks to the dominance of search, we believe that on the range of outcomes, Alphabet remains well positioned through its massive user distribution (9 products with over 1 billion users each), long-standing AI research labs (DeepMind and Google Brain), top AI talent, a solid cloud computing division in Google Cloud, and deep pockets for investing in AI.
During the quarter, Alphabet also held its annual I/O conference, where it provided an update on its efforts in AI including: Gemini is now used by 1.5 million developers; model quality is expanding rapidly (e.g., context window is now 2 million tokens of length); the new genomics model, Alphafold 3 can predict structures of molecules and potentially accelerate drug discovery; new TPU6 AI chips has shown a 4.7 times improvement in compute performance compared to the prior generation; and Gemini for workspace is showing early data on a 30% increase in user productivity. Alphabet also has real value in assets such as Waymo, which are not factored into valuation today (and are potentially included at a negative valuation as they currently generate losses, hurting EPS). We continue to believe that the current valuation of Alphabet presents an attractive risk/reward for long-term owners of the business and have therefore increased our position.”
