3. Alphabet Inc (NASDAQ:GOOG)
Number of Hedge Fund Investors: 160
Dan Niles from Niles Investment Management said in a latest program on CNBC talked about major tech companies and explained why GOOG shares didn’t move much after the latest results:
“And by the way, the four companies that are going to report—I think all of them are going to beat revenues, beat EPS, beat margins—and probably that should be good enough. But then you look at Google and you go, stock’s up less than 1% after having done all of those things. And so you wonder, are investors really thinking forward to the next leg of this, which is, yeah, that’s because demand has been pulled in and we’re going to have to pay that back sometime later this year. And so I’m going to actually start to think a little bit further ahead.”
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.
Merion Road Capital Management stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q1 2025 investor letter:
“The long only portfolio fell slightly over 8% during the quarter, primarily attributable to our tech-oriented holdings (GOOG, AMZN) and economically sensitive industrials (CLH, FERG). Regarding the former, there continues to be a debate as to whether or not their investments in AI will produce adequate returns. The AI race publicly began back in 2023 when Microsoft CEO Satya Nadella threw the gauntlet down stating that he hopes GOOG would “come out and show that they can dance.” In response, Alphabet Inc. (NASDAQ:GOOG) ramped their capex spend from $32bn in 2023 to almost $53bn last year, with a planned $75bn this year. So far, their pre-tax return on tangible capital has barely budged at 48% (though consensus has this falling next year). With a wide range of ubiquitous products, GOOG is as well positioned as anyone to win the war. For instance, the integration of AI overviews into search has produced strong metrics and the company is broadening its application to encompass novel query formats, including images and audio.
But will all of this investment generate an acceptable return? I don’t know. And it will be many years before we have an answer. CEO Pichai’s philosophy is that the cost of missing out on what could be a generational opportunity far outweighs the benefits of conserving its cash. This makes sense to me. Even if GOOG burns the majority of their free cash flow over the next couple years, that’s a drop in the bucket. The value in the business comes from the long tail of earnings from things like Search, Youtube, Cloud, and hopefully some of their moonshots (I’m looking at you Waymo). If AI returns disappoint, I believe GOOG will scale back.”
