4. Alphabet Inc (NASDAQ:GOOG)
Number of Hedge Fund Investors: 160
During a recent interview on CNBC, Ben Reitzes, Melius Research Head of Technology Research, talked about the “existential threats” Alphabet is facing related to its search business.
“We compared it to Kodak in terms of the innovator’s dilemma, where your eyes saw digital cameras coming and the digital revolution. It didn’t matter if it was really ready for prime time that exact second, but you knew it was coming. Eventually, it caught up with you, and the existential threat did come to bear there in the worst way possible. That’s not going to be really the case for Alphabet Inc (NASDAQ:GOOG), because they could break up and they have a lot of great assets. But nonetheless, it does remind us of the innovator’s dilemma. They don’t really know what to do; they’re experimenting here, experimenting there. Actually, nobody even knows what’s going on. The regular search, we think, is being disrupted by AI very clearly though, and they’ve got to make a bet soon.”
Alphabet posted strong quarterly results, but the market remains reluctant about the stock amid threats to its search business due to the onslaught of AI tools like ChatGPT. However, Alphabet Inc. (NASDAQ:GOOG) bulls believe these concerns are overstated.
Google has an edge over competitors because it’s easier for the billions of users of its search engine to switch to Gemini instead of opting for a completely new model. Google has over 1.5 billion monthly users interacting with its AI-powered Search overviews. OpenAI, Alphabet’s biggest competitor now when it comes to AI search, has less than 5% of its users paying, and its business model is still developing. Google’s first-quarter results showed continued strength in its cloud unit, with revenue up 28% year over year and solid operating income growth. This supports Google’s broader AI strategy and underscores the scale advantages of its cloud business.
The market is also 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 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.
Mairs & Power Balanced Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q1 2025 investor letter:
“The Fund’s holdings in the Communications Services sector dragged on portfolio returns during the quarter due primarily to security selection. Alphabet Inc. (NASDAQ:GOOG) led underperformance as it fell in tandem with the other mega cap tech stocks. Additionally, there is increasing concern about the impact of generative AI on Alphabet’s search business and whether it will be able to meaningfully respond.”
