4. Alphabet Inc (NASDAQ:GOOG)
Number of Hedge Fund Investors: 160
Gene Munster from Deepwater Asset Management said while talking to CNBC that the latest quarterly report from Alphabet Inc (NASDAQ:GOOG) was one of the most important in years because investors were looking for the impact of generative AI on the company’s search business and the performance of AI Overviews.
“I think this is probably the most important Google report in maybe 7 to 10 years, something around there. The reason is that 7 to 10 years ago, there was a lot of debate about how mobile was going to impact the business. Of course, that’s been the narrative around Google for the last year—how AI is going to impact the business. What we saw in their U.S. business, where the AI overviews saw their first full quarter, was that expectations were it would grow at 12%, but it grew at 19%. I think this is the first evidence, and the call has just been a chorus of commentary about how AI overviews are having a positive impact on the business. Now, we’re not out of the woods yet for Google investors, but I think this is the most encouraging data point after a lot of hand-wringing over the last several quarters.”
The market has been ignoring Alphabet Inc (NASDAQ:GOOGL)’s key secondary businesses and the stock remains undervalued despite concerns around AI search and regulatory onslaught.
With the 2025 EPS forecast at around $9, Alphabet (NASDAQ:GOOGL) could realistically achieve earnings closer to $10 if it maintains its historical outperformance rate. At a projected $10 EPS, Google’s forward P/E multiple would be approximately 17, a relatively low valuation for a diversified market leader.
What are the key drivers for Alphabet (NASDAQ:GOOGL)?
Alphabet Inc (NASDAQ:GOOGL) remains on track to reach a $100 billion revenue run rate from YouTube Ads and Google Cloud by the end of 2024. In its autonomous driving division, Waymo has shown notable progress, with paid autonomous rides growing 200% quarter-over-quarter to 150,000 weekly rides as of late October, thanks to a fleet of 700 vehicles in service since August.
This growth is significant: Waymo vehicles now average about 30.6 autonomous rides per day—substantially higher than Uber’s average of 4.18 rides per driver daily, based on Uber’s 31 million daily trips and 7.4 million drivers last quarter. This performance underscores Waymo’s competitive edge in autonomous ride volume compared to traditional ride-hailing.
In the third quarter, Alphabet Inc (NASDAQ:GOOGL)’s Search & Other segment saw a 12.2% year-over-year revenue increase, rising from $44.03 billion to $49.39 billion. YouTube advertising also performed well, with revenue up 12.2% to $8.92 billion from $7.95 billion. Meanwhile, Alphabet Inc (NASDAQ:GOOGL)’s subscriptions, platforms, and devices revenue grew even more sharply, surging 27.8% from $8.34 billion to $10.66 billion.
Google Cloud has been expanding steadily, with revenue climbing from $13.06 billion in 2020 to $33.09 billion in 2023. Notably, Google Cloud turned profitable for the first time in 2023, posting $1.72 billion in operating profit—a significant improvement from a $5.61 billion loss in 2020. This segment’s performance continues to strengthen, with the latest quarterly revenue reaching $11.35 billion, up 35% from $8.41 billion in the same period last year.
Alger Spectra Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q3 2024 investor letter:
“Alphabet Inc. (NASDAQ:GOOG) is the parent company of Google and a global leader in digital services and technology. Its main operating segments include Google Services (Search, YouTube, Google Play, Maps, etc.), Google Cloud Platform (GCP), and Other Bets (innovative ventures such as Waymo and Verily). Google Services generate most of Alphabet’s revenue, primarily from advertising. Their GCP provides infrastructure and tools for businesses, including AI and machine learning services. Alphabet extensively integrated AI across its products, enhancing search algorithms, personalizing content on YouTube, improving ad targeting, and driving innovations such as Waymo, their autonomous driving segment. While the company reported better-than-expected fiscal second quarter revenues and earnings, driven by strength in Search and GCP, advertising revenues from YouTube came in lower than expected. Separately, investor skepticism around the return on investment from Alphabet’s significant capital expenditures on AI infrastructure also weighed on the company’s share price. Despite reporting overall positive operating results, shares detracted from performance.”
