2) Alphabet Inc. (NASDAQ:GOOGL)
Average Upside Potential: ~29.4%
Forward P/E as of February 28: ~19.2x
Number of Hedge Fund Holders: 234
As per Morningstar, Alphabet Inc. (NASDAQ:GOOGL) has a wide moat, thanks to the intangible assets, network effect, cost advantage, and customer switching costs. The firm anticipates Google Search to see growth at a mid-to-high-single-digit level over the upcoming 5 years as and when the broader digital advertising market matures and growth rates slow down. Notably, YouTube is expected to grow at a low-double-digit rate over the next 5 years as robust advertising business continues to be supported by increased subscription business, says Morningstar. Alphabet Inc. (NASDAQ:GOOGL)’s core advertising business is significantly involved in the advertising budgets, allowing the company to benefit from a secular increase in digital advertising spending.
The cash flows generated by Alphabet Inc. (NASDAQ:GOOGL)’s advertising business can be reinvested in growth areas including Google Cloud Platform, AI-infused search, and dynamic projects like Waymo. Apart from this, Alphabet Inc. (NASDAQ:GOOGL) is well-placed to capture significant opportunity in the ever-evolving public cloud space given its position as a critical cloud vendor for enterprises focused on digitizing their workloads.
Qualivian Investment Partners, an investment partnership focused on long-only public equities, released 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.”
