Take profits in the chip giant Nvidia (NASDAQ:NVDA) was a popular move among billionaire hedge fund managers in the first quarter, with a number of them reducing their stakes in the company. Given the stock’s progress, it might not be surprising if some big-name investors took profits.
Billionaires reducing their stakes in Nvidia included Stanley Druckenmiller of Duquesne Capital Management, David Tepper of Appaloosa Management, Paul Tudor Jones of Tudor Investments and Philippe Laffont of Coatue Management.
Druckenmiller explained why he reduced his stake in Nvidia, saying in a CNBC interview that he still likes Nvidia but artificial intelligence (AI) could be overrated in the short term. However, he said the benefits could be significant in four to five years and AI could be underestimated in the long term.
While it’s common to see billionaire hedge fund managers taking profits on a stock like Nvidia, several large hedge fund managers are also piling into Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). Investors who bought the stock aggressively in the first quarter included Chase Coleman of Tiger Global, Glen Kacher of Light Street Capital, Gavin Baker of Atreides Management, and Michael Pausic and Nick Lawler of Foxhaven Asset Management.
Let’s take a look at why these investors might think Alphabet is an attractive investment.
Alphabet attracts investor interest
One of the first things that tends to catch the attention of hedge fund managers is valuation. Alphabet trades at a fairly significant discount to many other AI-related stocks, with a forward price-to-earnings (P/E) ratio of just 23.6 times. A number of competitors trade at over 35 times.
Additionally, this figure is lower than the multiple that Alphabet historically traded at before the pandemic, when it often traded above a P/E ratio of 30 times.
This gives Alphabet room to move higher, but valuation alone is not a reason why reputable hedge fund managers would buy the stock.
An investment in Alphabet is an investment in a company that has two dominant businesses with Google search and the YouTube video platform. Google is virtually a monopoly with an estimated 90% share of global search. Although some fears have been expressed about the impact of AI on its search business, the company is embracing the technology and deploying AI overlays at the top of page results to answer more complex questions.
Alphabet will look to new ad formats to help monetize its latest AI efforts to drive growth. With only about 20% of its search results comprising ads, this is actually a pretty big opportunity for Google Search to become even more profitable in the future by monetizing the search results it only earns from. no money now.
Alphabet’s YouTube platform should not be overlooked either. While many streaming services outside of Netflix have struggled to be profitable due to content costs, the revenue sharing model that Alphabet uses with creators has long alleviated these problems. Meanwhile, the company has strong opportunities to profit from short-form videos that compete with TikTok, which it has just started monetizing. If its competitor is banned in the United States, this could be a big opportunity for the company.
Additionally, Alphabet’s cloud computing business is still in its infancy in terms of profitability. Given the company’s high fixed costs, profitability is now expected to grow much faster than revenue, which will be boosted by AI adoption.
Should retail investors follow suit and buy Alphabet?
Alphabet is a relatively cheap stock with a dominant position in search and a big opportunity ahead of it with AI. Although the stock has had a good year, up about 27% year to date, it’s not too late to follow the hedge fund billionaires into this stock.
The company has a long growth path ahead and potential for multiple expansion (which is an increase in its valuation multiples, such as P/E). Together, this makes a powerful combination and makes the stock a Buy.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Geoffrey Seiler holds positions at Alphabet. The Motley Fool holds positions and recommends Alphabet, Netflix and Nvidia. The Motley Fool has a disclosure policy.
Billionaires are selling Nvidia and buying these stocks instead was originally published by The Motley Fool
