Alphabet has been a popular pick among several hedge funds.
With the latest round of 13F filings available (forms that must be filed periodically when a hedge fund has at least $100 million of assets under management), investors can see what professional fund managers have been doing. I’ve looked at a few of them, and one trend seems to be prevailing: Many are buying Alphabet (GOOG 0.72%) (GOOGL 0.83%).
Among the funds (and the billionaires that run them) adding to their Alphabet positions were Bridgewater Associates (Ray Dalio), Tiger Global Management (Chase Coleman), and Soros Fund Management (George Soros).
With so much interest in Alphabet’s stock, should you be following their lead and buying?
Alphabet is a tale of two businesses
Some people may not be familiar with Alphabet, but it’s the parent company of Google, YouTube, the Android operating system, and many other product lines. Analyzing Alphabet’s business is best done by focusing on two elements: advertising and artificial intelligence (AI).
Advertising is what keeps the lights on for Alphabet. In Q1, advertising revenue made up 77% of Alphabet’s total, making it the single most important business segment. The advertising market is succeeding right now, partially due to weak comparisons from 2023 when the ad market was struggling. However, that’s no longer the case, and Alphabet’s top-tier ad platforms are shining again.
AI has also been a large focus in the Alphabet investment thesis lately. At first Alphabet dealt with blunder after blunder when launching its AI products to the public. However, its latest releases have gone smoother, and Alphabet’s new AI technologies have attracted a great deal of interest. Perhaps the most noticeable thing is the AI summary that appears when a Google search is done. While this feature may not add much revenue to the company, it does keep the Google search engine at the top of the consumer’s mind, which is critical for its advertising business.
Another business adjacent to the AI theme is Google Cloud, its cloud computing division. With multiple AI-centered features, Google Cloud has become a top pick for AI developers. As a testament to these tools, 90% of generative AI unicorns (private companies with valuations greater than $1 billion) are Google Cloud customers. Google Cloud has also been crushing it, with revenue rising 28% year over year in Q1 and delivering an ever-improving operating margin of 9%.
While some had doubts last year, Alphabet is silencing those doubters this year, and the stock is responding because of it. In 2024 the stock is up 25%.
With success like that, it’s no wonder billionaires are piling into Alphabet stock. However, the timeframe the 13F filing encompasses ended on March 31 — nearly two months ago. Since then, the stock is up over 15%. So is it still a buy after the success it has seen in recent weeks?
Alphabet’s stock still trades at reasonable levels
We’ve already established that Alphabet’s business is doing well, so I’ll look at its valuation to see if the stock is reasonably priced. Because Alphabet is going through some business transformation and strong growth, I’ll use the forward price-to-earnings (P/E) ratio to value the stock. While this has some risks due to utilizing analyst projections, it’s a more accurate picture of the business.
GOOGL PE Ratio (Forward) data by YCharts
At 23 times forward earnings, it’s not the cheapest stock around. However, it’s slightly more expensive than the broader S&P 500, which has a forward P/E of 21.6.
For Alphabet’s growth prospects and execution, I’d say it deserves that premium over the broader market. So even after the run-up Alphabet’s stock has experienced, I’d say it’s still primed to beat the S&P 500 over the long term, making now a great time to follow what billionaires are already doing and buy Alphabet stock.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.