4. Alphabet (NASDAQ:GOOG)
Number of Hedge Fund Investors: 160
John Belton from Gabelli Funds said in a latest program on Schwab Network that despite key challenges to search business and overlooked negative sentiment, he likes Alphabet (NASDAQ:GOOG).
“That’s a little bit more disliked right now in the investment community. I would defend Google here. Google’s trading at about 16 times next year’s GAAP earnings, and I know there’s structural questions about how search is going to fare in the era of generative AI. Is AI going to disrupt search? I mean, I would just say these types of questions about existential threats to Google search seem to come up every couple years, and Google just powers right through every time. I think what’s really interesting about Google is there’s a lot they can do to continue to drive efficiencies in their P&L and to take out costs and to improve margins. They have a new CFO who came from Eli Lilly. I think she seems very committed to driving cost efficiencies. And back to the valuation point, so long as Google can hit these nearer-term numbers, I think that’s sort of the catalyst to get this stock working again. So Google’s a name that has been beaten up, it’s lagged, there’s questions. I think it’s just too cheap for the type of quality.”
Alphabet’s search business is under threat from AI. However, its Gemini model has an edge over competitors because of the huge ecosystem Alphabet already has. For the end user, it’s easier to switch from traditional search to Gemini instead of moving to a completely new app like ChatGPT or Perplexity. So far AI competition hasn’t dented the company’s search revenue.
In the fourth quarter, Alphabet’s operating margin rose 32%. YouTube ad revenue jumped 14% and Cloud revenue skyrocketed by 30.1%. Google raked in $12.8 billion in FCF, marking a roughly 215% growth compared to the same period last year, despite heavy investments in AI. The stock has a forward (2026) P/E ratio of 20.8x, which makes it about 22% cheaper than the average company in its sector.
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. Waymo has shown notable progress. 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.
Burke Wealth Management stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q4 2024 investor letter:
Alphabet: We parted ways with long-term holding Alphabet during the fourth quarter. We’ve owned Alphabet since the inception of the Focused Growth strategy so obviously, the company has many positive attributes that we admire. That remains the case. We have long contended that Google search is the best business in the world. However, developments over the past couple of years on the competitive front (generative AI search) and the regulatory/legal front have put the sustainability of Google’s search monopoly at legitimate risk for the first time since Microsoft launched Bing in 2009. We cut our weighting in Google in half last year as we wanted to take some time to better assess the threat of generative AI driven search to its business model. To be fair, this emerging threat has been something more akin to a gathering storm than a tornado. Capital continues to flow into the space both from start-ups and the Microsoft/Open AI collaboration. Thus far, this has not resulted in a material erosion of market share but it is certainly something requiring continued monitoring….” (Click here to read the full text)
