We recently published a list of the 10 AI stocks that hedge funds are buying and selling, and Alphabet Inc. (NASDAQ:GOOG) was ranked number 4 on the list, so it might be worth taking a closer look.
The AI-driven stock market rally is expected to spread to other sectors and smaller tech companies, but analysts believe large-cap stocks remain the primary target for money managers for now. In an August key thematic report, Morgan Stanley said small-cap stocks have rallied on hopes of rate cuts, but their window of opportunity to outperform is “too narrow.”
“Historically, small-cap outperformance has been primarily dependent on accelerating economic growth. Increased risk exposure to a 'higher for longer' environment has added an inverse interest rate correlation. While periods of accelerating growth and lower interest rates are possible (e.g., end-2023), we believe this combination is relatively unlikely in the current inflationary environment. The recent decline in interest rates has been a tailwind for small-cap stocks, but softening economic data may limit the sustainability of this trade,” the firm said.
Recent earnings calls have revealed that while the ROI on big AI spending by major companies is small in the short term, the long-term benefits are promising. Many companies have already started to monetize their AI investments. In their June report, “GEN AI: TOO MUCH SPEND, TOO LITTLE BENEFIT?”, Goldman Sachs analysts Joseph Briggs, Kash Langan and Eric Sheridan said they remain optimistic about AI's economic potential, even if there are no immediate benefits at present.
Hedge funds are one step ahead of the average retail investor because of the sheer size of resources and capital they hold. That's why it's always interesting to see what stocks they're buying and selling. In this article, we look at the 10 most important AI stocks that caught the attention of elite asset managers based on their second-quarter reports. Why are we interested in the stocks that hedge funds are flooding with? The reason is simple: our research shows that you can outperform the market by imitating the top picks of the best hedge funds. Our quarterly newsletter strategy selects 14 small and large stocks every quarter and has returned 275% since May 2014, beating the benchmark by 150 percentage points (more here).
Are hedge funds buying and selling Alphabet Inc. (NASDAQ:GOOG) AI stock?
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Alphabet Inc. (NASDAQ:GOOG)
Total hedge fund investors at end of Q2: 165
Total hedge fund investors at end of Q1: 165
Billionaire Bill Ackman's Pershing Square reduced its holdings of Google parent Alphabet's Class C capital stock (GOOG) by 19.5% to 7.55 million shares and its Class A capital stock (GOOGL) by 8.5% to 3.99 million shares. Chris Horn's TCI increased his stake in the company by about 400%, while billionaire Philippe Lafont reduced his stake in Alphabet by 39% to $504 million.
Alphabet Inc Class C (NASDAQ:GOOG) shares recently fell following reports that OpenAI is developing a web search product called SearchGPT. Prior to that, shares fell after the company released earnings despite reporting strong numbers. Q2 revenue grew 14% year over year, driven by search and cloud. Analysts believe that at 22x forward earnings, Alphabet Inc Class C (NASDAQ:GOOG) remains one of the cheapest AI stocks on the market, as valuations remain depressed due to overreaction fears.
Despite the ongoing caution surrounding its search business, Alphabet Inc Class C (NASDAQ:GOOG) search revenues increased about 13.7% year over year in the second quarter. As of the end of June, Google held about 91.06% share of the search engine market, only 1.65% lower than its December 2019 level. AI-driven overview analysis and other search initiatives will allow Alphabet Inc Class C (NASDAQ:GOOG) to keep competitors at bay due to its market dominance.
Cloud and YouTube are two key powerful catalysts for Alphabet Inc Class C (NASDAQ:GOOG) stock. In the second quarter, Alphabet's cloud revenue grew 28.8% to $10.35 billion, well above analysts' previous expectations of $10.16 billion. Alphabet Inc Class C (NASDAQ:GOOG) is on track to achieve a $100 billion revenue run rate from YouTube advertising and Google Cloud by the end of 2024.
In its Q2 2024 investor letter, Pershing Square Holdings said the following about Alphabet Inc. (NASDAQ:GOOG):
“Google's parent company, Alphabet Inc. (NASDAQ: GOOG), delivered stellar results in the first half of 2024. Revenue increased 14%, driven by Google's dominant position in the fast-growing digital advertising market and certain company-specific tailwinds, including increased adoption of AI automation tools by advertisers and YouTube's continued success in connected TV media. Strong revenue growth, combined with cost control efforts and stable headcount levels (employee count remains flat since the beginning of the year), resulted in strong operating leverage. Excluding one-time severance and real estate expenses, operating margins expanded by approximately 340 basis points. In the second quarter, the company's cloud division outperformed major competitors with revenue growth of 29% and margins of 11% after achieving profitability for the first time just 18 months ago.
Amid the robust performance, Google has hit a notable milestone on its AI product development roadmap. At its annual developers conference in early May, the company announced the broad rollout of “AI Overviews” – AI-powered summary responses to certain types of queries. Early results from AI Overviews highlight that thoughtful integration of AI into search not only improves user experience and increases the frequency and granularity of queries, but also creates ad monetization opportunities through context-rich responses and higher conversion rates…” (Click here to read the full story)
Overall, Alphabet Inc. (NASDAQ:GOOG) ranks #4 on Insider Monkey's list of “10 AI Stocks Hedge Funds are Buying and Selling.” While we value Alphabet Inc. (NASDAQ:GOOG), we believe AI stocks have a higher chance of delivering higher returns, and can do so in a shorter time frame. If you're looking for AI stocks that are more promising than GOOG, but still trade for less than five times earnings, check out our report on the cheapest AI stocks.
Read next: Analysts see a new $25 billion “opportunity” for NVIDIA, and Jim Cramer recommends these stocks.
Disclosures: None. This article was originally published on Insider Monkey.
