We recently published a list of Hedge Funds are Buying and Selling These 10 AI Stocks. Since Alphabet Inc. (NASDAQ:GOOG) ranks 4th on the list, it deserves a deeper look.
The AI-led rally in the stock market is expected to ripple through other sectors and smaller tech companies, but analysts believe for now large-cap companies are still the key focus of money managers. Morgan Stanley in its August key themes report said that while small-cap stocks rebounded on rate-cut hopes, the window for their outperformance is “too narrow.”
“Historically small cap outperformance depended primarily on economic growth acceleration. Greater risk exposure to a “higher-for-longer” rate environment has added inverse rate correlation to the mix. While periods of growth acceleration with lower rates are plausible (e.g. end-2023), we see this combination as relatively unlikely in the current inflation environment. The recent decline in interest rates was a tailwind to small cap stocks, but softer economic data likely limits the durability of this trade,” the firm said.
The latest earnings season showed that ROI on the huge AI spending by major companies is small in the short term, but long-term gains seem promising. Many companies have already started seeing monetization on their AI investments. Goldman Sachs analysts Joseph Briggs, Kash Rangan, and Eric Sheridan said in a June report titled GEN AI: TOO MUCH SPEND, TOO LITTLE BENEFIT? that they remain more optimistic about AI’s economic potential even if we don’t see immediate benefits for now.
Hedge funds are one step ahead of average individual investors due to the sheer scale of resources and capital they have. That’s why it’s always interesting to see which stocks they are buying and selling. In this article we take a look at the 10 most important AI stocks which were on the radar of elite money managers based on their second-quarter filings. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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Alphabet Inc (NASDAQ:GOOG)
Total Number of Hedge Fund Investors as of the End of Q2: 165
Total Number of Hedge Fund Investors as of the End of Q1: 165
Billionaire Bill Ackman’s Pershing Square reduced its stake in Google-parent Alphabet’s class C capital stock (GOOG) by 19.5% to 7.55 million shares and in its class A capital stock (GOOGL) by 8.5% to 3.99 million shares. Chris Hohn’s TCI increased its hold in the company by about 400% while billionaire Philippe Laffont reduced his stake in Alphabet by 39% to $504 million.
Alphabet Inc Class C (NASDAQ:GOOG) shares slipped recently following reports that OpenAI is working on a web search product called SearchGPT. Before that, the stock fell following earnings despite posting strong numbers. Revenue in the second quarter jumped 14% year over year driven by search and Cloud. At a forward P/E of 22, analysts believe Alphabet Inc Class C (NASDAQ:GOOG) continues to be one of the cheapest AI stocks in the market as its valuation remains depressed amid fears caused by an overreaction.
Despite constant alarms going off about its search business, Alphabet Inc Class C (NASDAQ:GOOG) search revenue jumped about 13.7% in the second quarter year over year. As of the end of June, Google has about 91.06% share of the search engine market, just 1.65% lower than the December 2019 levels. With AI overviews and other search initiatives, Alphabet Inc Class C (NASDAQ:GOOG) will be able to stave off any competitors given its dominance in the market.
Cloud and YouTube are two key strong catalysts for Alphabet Inc Class C (NASDAQ:GOOG) shares. During the second quarter, Alphabet’s Cloud revenue rose 28.8% to $10.35 billion, crushing past analysts’ forecasts of $10.16 billion. Alphabet Inc Class C (NASDAQ:GOOG) is on the path to reach a $100 billion revenue run-rate from YouTube Ads and Google Cloud by the end of 2024.
Pershing Square Holdings stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q2 2024 investor letter:
“Alphabet Inc. (NASDAQ:GOOG), the parent company of Google, delivered stellar business results in the first half of 2024. Revenues grew 14% powered by Google’s dominant position in the fast-growing digital advertising market as well as certain company-specific tailwinds including the increasing adoption of AI automation tools by advertisers and YouTube’s continued success in the Connected TV Medium. Strong revenue growth coupled with cost control initiatives and stable staffing levels (headcount has remained flat year-to-date), resulted in strong operating leverage. Operating profit margins expanded approximately 340 basis points, excluding one-time severance and real estate charges. In the second quarter, the company’s Cloud segment outpaced its major competitors with 29% revenue growth and achieved 11% profit margins, after first reaching profitability just 18 months ago.
Amidst solid financial performance, Google is achieving notable milestones in its AI product development roadmap. At its annual developer conference in early May, the company unveiled the broad rollout of “AI Overviews”, which are AI-powered summary responses for certain types of queries. Early results from AI Overviews highlight how thoughtful integration of AI into Search not only improves the user experience, leading to more frequent and detailed queries, but also creates opportunities for greater ad monetization through context-rich responses and higher conversion rates…” (Click here to read the full text)
Overall, Alphabet Inc. (NASDAQ:GOOG) ranks 4th on Insider Monkey’s list titled Hedge Funds are Buying and Selling These 10 AI Stocks. While we acknowledge the Alphabet Inc. (NASDAQ:GOOG), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GOOG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.