We recently compiled a list of the 10 Most Promising Growth Stocks According to Hedge Funds. In this article, we are going to take a look at where Alphabet Inc. (NASDAQ:GOOGL) stands against the other Most Promising Growth Stock According to Hedge Funds.

Bull Market and Investor Sentiment

Investors had been anxiously anticipating the start of a bull market, which the S&P 500 confirmed earlier this year. The bull run has seen the market continue to rise to new record highs, supporting revenue and earnings growth across the board.

Fast forward, the upward momentum appears to have peaked, with market indices at record highs. While it was highly expected that stocks would explode on the Federal Reserve offering support to a struggling economy with interest rate cuts, that has not been the case.

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It’s become increasingly clear that investors have become more sensitive to growth scares as the global economy faces many issues. Top on the list is the rising geopolitical tensions in the Middle East that threaten to disrupt supply chain networks. Energy prices rising owing to the escalation of a full-blown war could trigger higher inflation, something that is unsettling the markets.

Analysts at UBS are already warning investors that they should get overweight on defensive names as global growth slows at the back of deteriorating fundamentals. While UBS doesn’t anticipate a severe downturn, the bank is cautious, advising its clients to focus on important sectors like utilities and pharmaceuticals, which always outperform in a downturn.

While investors are increasingly rotating into defensive plays amid concerns about geopolitical tensions and the slowing global economy, Morgan Stanley Investment Management’s Andrew Slimmon recommends against this strategy.

“Now is the time to just be cautious. Don’t chase the defensives that are working because I think when we get to the fourth quarter, that won’t work,” the portfolio manager told CNBC’s “The Exchange.

“While our expectation is for October to remain choppy, we don’t view the overall market action to be bearish and encourage investors to maintain perspective on the longer-term trends,” Robert Sluymer, technical strategist at RBC Wealth Management, wrote to clients.

The sentiments echo the need to focus on high-growth companies. Investors who diversify their portfolio into high-growth companies eventually earn great returns regardless of how much a stock rises or falls in the short term.

Analysts project that S&P 500 stocks will grow at a median annual EPS rate of 8.5% over the next five years. On the other hand, the best growth stocks are well poised to outperform this benchmark by a factor of two to three or more.

For starters, companies exposed to artificial intelligence spectacles or those leveraging technology continue to deliver record earnings and revenue growth, thus dominating most hedge fund portfolios. Additionally, the most promising growth stocks, according to hedge funds, are those whose core business would be positively impacted by improving consumer purchasing power. As the Fed steers the economy into a soft landing, consumer purchasing is expected to improve, benefiting consumer cyclical stocks. Moreover, the rate cuts will likely benefit growth and tech stocks as well.

Market fluctuations are inevitable, but the secret to a growth stock’s success lies in the robustness of its core operations. Regardless of whether a stock is rising or falling in the short term, if you consistently invest in a competitively solid business, you’ll eventually reap substantial rewards.

Our Methodology

To compile the list of the most promising growth stocks according to hedge funds, we sifted through ETFs and online rankings to find 30 popular growth stocks. Then we selected the 10 that were the most widely held by hedge funds, as of Q2 2024. Finally, we ranked the stocks in ascending order of the number of hedge funds that have stakes in them.

At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Alphabet Inc. (NASDAQ:GOOGL)

Number of Hedge Fund Holders: 216

Alphabet Inc. (NASDAQ:GOOGL), a global tech titan, has made a name for itself on a search that continues to power its lucrative advertising business. While the company controls a 90% market share in search, it remains well-positioned to generate significant value as the digital advertising industry grows by more than 15%  through the rest of the decade.

Additionally, Alphabet Inc. (NASDAQ:GOOGL) owns the largest video platform, YouTube, the top streaming service in daily TV viewership. As more families opt to cancel their conventional cable plans in favor of the more affordable and more accessible nature of streaming services, YouTube is expected to attract more viewers. This, in turn, will result in increased advertising income for the company.

The ad sales from YouTube brought in $8.7 billion for Alphabet in the second quarter, showing a growth from the $7.7 billion seen in the year before and affirming why it is one of the most promising growth stocks according to hedge funds.

On the other hand, Google Cloud ranks as the third most popular cloud service globally, just after Amazon Web Services and Microsoft Azure. Google Cloud reported a 29% increase in revenue from the previous year in the second quarter. Moreover, it achieved $1.2 billion in operating income, achieving a profit margin of 11%.

The operating margin for Alphabet Inc. (NASDAQ:GOOGL) has consistently been outstanding, averaging a remarkable 26.6%. Its substantial earnings allowed Alphabet to produce an impressive $13.5 billion free cash flow (FCF) during the second quarter. The firm is utilizing this FCF to fund its artificial intelligence technology and benefit its investors by buying back shares and distributing a $0.20 dividend. Analysts on Wall Street maintain a buy rating on Alphabet with an average price target of $206.60, implying 26.77% upside potential.

As per the Insider Monkey database, 216 hedge fund portfolios held Alphabet Inc. (NASDAQ:GOOGL) at the end of the second quarter, which was 222 in the previous quarter.

Overall GOOGL ranks 4th on our list of 10 Most Promising Growth Stocks According to Hedge Funds. While we acknowledge the potential of GOOGL as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GOOGL, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.