1. Alphabet Inc. (NASDAQ:GOOGL)
Forward P/E as on February 28: ~19.2x
10-Year Sales Growth: ~18.1%
Number of Hedge Fund Holders: 234
Alphabet Inc. (NASDAQ:GOOGL) provides various products and platforms. The company’s Q4 2024 was a strong one thanks to its leadership in AI and momentum throughout the business. Its AI-powered Google Cloud portfolio continues to see healthy customer demand, with YouTube continuing to be the leader in streaming watch time and podcasts. Together, Cloud and YouTube managed to exit 2024 at an annual revenue run rate of $110 billion. The consensus among Wall Street analysts is that Alphabet Inc. (NASDAQ:GOOGL)’s investments in AI and cloud infrastructure are expected to place it well for future growth, despite short-term pressures.
AI-powered solutions are expected to differentiate Google Cloud Platform from competitors, bringing in more enterprise customers and fueling revenue growth. Alphabet Inc. (NASDAQ:GOOGL)’s AI advancements are expected to result in new product categories and services, which can help open up additional revenue streams over and above traditional advertising. Reuters, while highlighting the comments from CFO Anat Ashkenazi, mentioned that Alphabet Inc. (NASDAQ:GOOGL) continues to spend significantly on infrastructure development to aid AI research and integration into products including Search and Cloud services. Notably, the majority of capex for 2025 is expected to go into building servers and data centers.
Qualivian Investment Partners, an investment partnership focused on long-only public equities, published its Q3 2024 investor letter. Here is what the fund said:
“Alphabet Inc. (NASDAQ:GOOGL): Q2 2024 revenues and EPS beat expectations, with total revenues growing 14%, Search ad revenues growing 14%, YouTube ads growing 13%, and Google Cloud revenues growing 29%. Revenue growth in the quarter constituted a continued sequential improvement from earlier quarters in the year, suggesting a continued rebound in Alphabet’s core business except for YouTube ad revenues, which missed expectations and showed deceleration in the growth rate as compared to Q1 when it grew 21%. Operating margins improved by 310 bps vs. the same quarter last year.
Management continued to highlight developments with their generative AI program, which is seen as a foundational platform with opportunities across their businesses but particularly in search and cloud. However, this comes with material capex investment well ahead of the expected economic benefits from Gen AI, and the level of spending is leading investors to worry about the ROI on that spend for Alphabet, as well as the other hyperscalers (Microsoft and Amazon). We continue to have confidence in Alphabet’s ability to generate strong revenue, earnings, and cash flow growth well above the S&P 500’s in the years to come and view it as a core holding for the long term.”
While we acknowledge the potential of GOOGL as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for a deeply undervalued AI stock that is more promising than GOOGL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap.
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