4. Alphabet Inc (NASDAQ:GOOG)
Number of Hedge Fund Investors: 160
Jessica Inskip from StockBrokers talked about Alphabet’s AI growth catalysts in a latest program on Schwab Network. She is bullish on the stock amid the company’s Gemini 2.0 model.
“The implementation of AI starts from beginning to finish, so starting with Nvidia, those are the chips, and then going on to training the models. What Google does is they have TPUs, those are tensor processing units that’s specific to Google. Those are chips that are specific for training AI models and making them quicker. So now that we’re focusing on cloud compute growth, we want to see AI agents, which is something that Google is having. But in coupling with those TPUs and faster training of those AI models, we’re going to see basically Enterprise Solutions coming forth, and we see that with Gemini 2.0. So all of that, yeah, ties into Gemini 2.0, better products that could be from the Enterprise size. And additionally, it also, they have initiatives that are going to help their operating efficiencies as well. So growth on the top and on the bottom.”
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.
Alphabet Inc (NASDAQ:GOOGL)’s secondary ventures in AI, autonomous driving, and other areas are making solid progress, especially in the Waymo robotaxi segment. Currently, Alphabet Inc (NASDAQ:GOOGL)’s stock trades below 20 times forward earnings, offering potential upside as EPS and other financial metrics strengthen in coming years. For next year, the consensus EPS estimate sits around $9. However, Alphabet Inc (NASDAQ:GOOGL) has consistently beaten projections, delivering $7.54 in trailing twelve-month EPS compared to the expected $6.79—a roughly 11% outperformance.
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.
RiverPark Large Growth Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q3 2024 investor letter:
“Alphabet Inc. (NASDAQ:GOOG): Google was our top detractor in the third quarter despite reporting second quarter results that were generally in line with expectations. The company reported slightly better revenue growth in Search, which grew 14% and continues to be resilient in the face of AI challengers, and Google Cloud, which grew 29% in the quarter. Service operating income margins of 40% and Cloud operating income margins of 11% were also both ahead of investors’ expectations as management’s cost-efficiency efforts drove operating leverage. YouTube revenue growth was slightly below expectations (+13% v. +16%) driven by tougher year-over-year comparisons and some general weakness in the Brand Advertising vertical. Finally, Cap Ex in the quarter of $13.2 billion was more than expected and likely the driver of the weakness in the stock as investors grapple with how much infrastructure investment will be required to achieve Google’s AI goals.
With its high margin business model (44% EBITDA margins last quarter), continued strength across its core Search and YouTube franchises, and continued growth and expanding profitability in its still relatively small Cloud business, we continue to view Alphabet as among the best-positioned secular growth franchises in the market. Additionally, GOOG shares trade at a compelling 19.5x the Street’s 2025 EPS estimate, a discount to the Russell 1000 Growth Index.”
