3. Alphabet Inc. (NASDAQ:GOOG)
10-Year Revenue CAGR: 18.24%
Number of Hedge Fund Holders: 160
Alphabet Inc. (NASDAQ:GOOG) is a multinational technology conglomerate that serves as the parent company of Google, YouTube, and a diverse portfolio of subsidiaries, including Waymo, a leader in self-driving technology. It has also developed Gemini, a family of advanced LLMs that power its chatbot and enhance AI features in Google Search.
During Q3 2024, the company generated $88.3 billion in revenue, a 15% year-over-year increase. Google Advertising remained the primary revenue driver, contributing over 74% of the total revenue. In response to investor expectations for a strong return on significant AI investments, management is exploring strategies to enhance monetization through AI Overviews and other innovative features.
To elevate the internet search experience, Alphabet Inc. (NASDAQ:GOOG) has introduced AI Overviews. This feature delivers AI-generated summaries at the forefront of search results, integrating text, images, and links to facilitate user access to information. AI Overviews is projected to serve over a billion users monthly and is currently undergoing a global rollout across 100 countries.
The company’s CEO emphasized its progress in optimizing AI Overviews, achieving over 90% reduction in cost per query within 18 months while doubling the scale of its custom Gemini model. It’s fair to say that Alphabet Inc. (NASDAQ:GOOG) is positioned to capitalize on the emerging AI trends.
Despite investor concerns regarding significant capital expenditures related to AI development, RiverPark Large Growth Fund highlighted Alphabet Inc.’s (NASDAQ:GOOG) strong Q3 results, including robust Search and Cloud growth. Here’s what the firm stated 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.”
