3. Alphabet Inc Class C (NASDAQ:GOOG)
Number of Hedge Fund Investors: 160
Lee Munson, president and CIO of Portfolio Wealth Advisors, explained in a latest program on CNBC why he likes Alphabet Inc Class C (NASDAQ:GOOG) stock:
“Everybody likes to rip on Google because they’re always like second place in implementation, you know, second or third place in Cloud. They’re known as a company that always executes second best. But here’s the thing: If you want to win the Tour de France, just come in fourth place on every single race, and you will win the championship, right? And so Google is that same way. I think Gemini’s had, you know, it’s got bad press from the Olympic ads and people want to bag on it. More people are looking at Gemini and happy with the effect than on ChatGPT. You know, everybody is getting used to the idea of what Gemini is, and most importantly, Google figured out how to have Gemini link back to sponsored content. The cash cow keeps going. Antitrust doesn’t care. The quantum chips, you know, that doesn’t mean a lot to me, but it’s all positive PR Google needs. It’s cheap, and I love cheap cash cows.”
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.
Conventum – Alluvium Global Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q3 2024 investor letter:
“Alphabet Inc. (NASDAQ:GOOG), ie Google/YouTube, having returned 20.8% in the June quarter, gave a fair bit of that back by falling 8.8%. Its results seemed pretty positive, and appeared to beat expectations. Management claims its AI integration into its search business is working well, and the margin expansion from costs out is expected to continue. Market chatter suggests that the selloff stems from concerns about the high capital spending on servers and data center equipment. Alphabet has made it clear that this spending is necessary, and somewhat defensive as it can’t risk losing the AI war (a “build it, and they will come” approach). Also, the new Department of Justice case against it probably did not help matters. Nonetheless, we saw no need to adjust our estimates. We wrote last quarter that it traded at a premium to our valuation, but not so much as to warrant selling. With the share price falling and the premium reducing, our view is unchanged. It represents 4.4% of the Fund.”
