4. Alphabet Inc. (NASDAQ:GOOGL)
Number of Hedge Fund Investors In Q1 2024: 222
Alphabet Inc. (NASDAQ:GOOGL) is a global household name due to its variety of products such as Google Search, YouTube, and Gmail. The bulk of Alphabet Inc. (NASDAQ:GOOGL)’s fortunes are because of its dominance in the global search engine industry and lucrative deals with firms like Apple that make Search the default platform on thousands of devices. Additionally, Alphabet Inc. (NASDAQ:GOOGL) is also a key player in the AI software industry, and its models compete with big ticket players such as the Microsoft backed OpenAI. Any threats to Alphabet Inc. (NASDAQ:GOOGL)’s dominance in Search, any alternative products by customers, and a shift in global use cases to AI that’s not developed by Alphabet Inc. (NASDAQ:GOOGL) could be bad news for the firm.
Baron Funds mentioned Alphabet Inc. (NASDAQ:GOOGL) in its Q1 2024 investor letter. The firm wasn’t particularly worried about the technology giant losing its dominant status in the market. Here is what the firm said:
During the quarter, we initiated a position in Alphabet Inc., the parent company of Google, the world’s largest search and online advertising company. Alphabet has over 90% market share in its core Google search business, it owns the world’s leading video platform, YouTube (which has over 2 billion users), a competitive cloud service provider, Google Cloud, a leading ad network, and optionality in a number of smaller subsidiaries like the autonomous vehicle company, Waymo.
Google’s core search business continues to grow at a solid clip, and we believe it could structurally earn much higher margins than it does today as the company increases operating efficiency. Google Cloud should also continue growing in the healthy double digits for years to come given the relatively early stage of cloud adoption with $597 billion total cloud spending14 in 2023 out of worldwide IT spending of $4.7 trillion15, or around 13%. Additionally, YouTube has a long runway for growth, driven by the growing adoption of connected TV and the shift of advertising dollars from linear TV.
When ChatGPT originally came out in November 2022, it appeared that Google was caught a bit unprepared for a potential change in the way people search. While the advancements of GenAI represent a risk to Google, we believe investors underappreciate the company’s positioning in AI and have assigned too high of a probability that the risk materializes. Alphabet owns the largest consumer training datasets (particularly across Search and YouTube), which in our view are important ingredients for competitive advantages in AI, it has massive user distribution (nine products with over 1 billion users each), long-standing AI research labs (DeepMind and Google Brain), top AI/ML engineering talent (Google invented the transformer AI architecture16, which is the basis for the modern LLMs including Chat GPT), a solid cloud computing division in Google Cloud, and deep pockets for investing in AI.
