We recently published a list of Billionaire Paul Singer Says Stay Away from These 7 AI Bubble Stocks; 3 Tech Stocks He’s Buying. Since Alphabet Inc Class C (NASDAQ:GOOG) ranks 5th on the list, it deserves a deeper look.
Billionaire Paul Singer’s Elliott Management has reportedly said in a latest letter to investors that mega-cap AI tech stocks are in “bubble land” and Nvidia is “overhyped.” The fund said in its letter that it’s skeptical about the notion that technology companies will keep buying AI chips in high volumes in the future, adding that AI is “overhyped with many applications not ready for prime time”. It also claimed that many AI use cases are “never going to be cost-efficient, are never going to actually work right, will take up too much energy, or will prove to be untrustworthy.” The fund reportedly said in its letter that AI is in effect software that has failed to deliver “value commensurate with the hype”.
The $66 billion Elliott Management founded by billionaire Paul Singer, who is one of the most feared activist investors in the US, said there are “few real uses” of AI other than “summarising notes of meetings, generating reports and helping with computer coding”.
Elliott Management said in its letter that it stayed away from “bubble” stocks included in the Magnificicient Seven group.
Elliott Management last year posted a modest gain of 4.7%. However, it has a record of no down years since the financial crisis in 2008. Since its inception in 1977, the fund has reported just two down years, a feat hard to match in the hedge fund industry.
While Elliott calling mega-cap AI stocks a bubble is a major development, it’s certainly not a surprise. Many investors and market experts have been warning about the hype around major AI stocks.
Here is what Insider Monkey’s founder and Research Director Inan Dogan said about Elliott Management’s latest thoughts on AI stocks:
“I have been saying that NVDA’s market cap assumes that the company will make around $150 billion in profits perpetually which is crazy. Elliott is saying the same thing and it is becoming news! Investors don’t know how to bet on the AI revolution, so the only visible companies that they think will benefit are semiconductor and cloud companies. That’s why they have been piling into NVDA. It doesn’t mean that other tech companies are in a bubble territory. In contrast, if Elliott is right that other megacaps are overspending on NVDA chips right now, this implies that their earnings are understated and they are actually much more profitable and cheaper than Elliott thinks. That’s why NVDA and cloud companies are in different categories. NVDA could be in bubble territory but I am not sure other megacaps in the Magnificient Seven group are in a bubble.”
For this article, we analyzed the top AI stocks in the Mag. 7 group which according to Paul Singer are in a bubble. We also talked about three AI/tech stocks that were in Singer’s portfolio, as of the end of the first quarter of this year. Why are we interested in 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).
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Alphabet Inc Class C (NASDAQ:GOOG)
Number of Hedge Fund Investors: 165
GOOG is an important part of the Mag. 7 group of stocks which Singer believes are in a bubble.
Alphabet Inc Class C (NASDAQ:GOOG) shares slipped recently following reports that OpenAI is working on a web search product called SearchGPT. Before that, the stock fell following earnings despite posting strong numbers. Revenue in the second quarter jumped 14% year over year driven by search and Cloud. At a forward P/E of 22, analysts believe Alphabet Inc Class C (NASDAQ:GOOG) continues to be one of the cheapest AI stocks in the market as its valuation remains depressed amid fears caused by an overreaction.
Despite constant alarms going off about its search business, Alphabet Inc Class C (NASDAQ:GOOG) search revenue jumped about 13.7% in the second quarter year over year. As of the end of June, Google has about 91.06% share of the search engine market, just 1.65% lower than the December 2019 levels. With AI overviews and other search initiatives, Alphabet Inc Class C (NASDAQ:GOOG) will be able to stave off any competitors given its dominance in the market.
Cloud and YouTube are two key strong catalysts for Alphabet Inc Class C (NASDAQ:GOOG) shares. During the second quarter, Alphabet’s Cloud revenue rose 28.8% to $10.35 billion, crushing past analysts’ forecasts of $10.16 billion. Alphabet Inc Class C (NASDAQ:GOOG) is on the path to reach a $100 billion revenue run-rate from YouTube Ads and Google Cloud by the end of 2024.
Conventum – Alluvium Global Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q2 2024 investor letter:
“Alphabet Inc. (NASDAQ:GOOG), ie Google / YouTube, returned 20.8%. Although management reported good news – solid quarterly results, the expectation of margin expansion throughout 2024, as well as a maiden dividend (to add to its share repurchases) – we suspect the share price bounce was as much related to AI euphoria as it was to that positive news. From our perspective, the figures were largely as expected and there was no cause for us to change our assumptions nor estimates. Clearly Alphabet now trades at a larger premium to our valuation, but given the conservativeness of that valuation, in our view the premium is still not so much as to warrant selling. It represents 5.3% of the Fund.”
Overall, Alphabet Inc Class C (NASDAQ:GOOG) ranks 5th on Insider Monkey’s list titled Billionaire Paul Singer Says Stay Away from These 7 AI Bubble Stocks; 3 Tech Stocks He’s Buying. While we acknowledge the potential of Alphabet Inc Class C (NASDAQ:GOOG), 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 GOOG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These Stocks.
Disclosure: None. This article is originally published at Insider Monkey.
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