Take profit in chip giant Nvidia (NASDAQ: NVDA) was a popular move among billionaire hedge fund managers in the first quarter, with a number of notable companies reducing their stakes in the company. Given the run the stock has had, it may not come as a surprise that some big investors made profits.
Among the billionaires who reduced their stakes in Nvidia were Stanley Druckenmiller of Duquesne Capital Management, David Tepper of Appaloosa Management, Paul Tudor Jones of Tudor Investments and Philippe Laffont of Coatue Management.
Talking about his reason for reducing his stake in Nvidia, Druckenmiller said in a CNBC interview that he still liked Nvidia, but artificial intelligence (AI) might become overhyped in the short term. However, he said the big payout could be big in four to five years and that AI may be underhyped in the long run.
While it’s common for billionaire hedge fund managers to take some profit on a stock like Nvidia, several top hedge fund managers are also piling in Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). Investors who bought the stock aggressively in the first quarter included Tiger Global’s Chase Coleman, Light Street Capital’s Glen Kacher, Atreides Management’s Gavin Baker and Foxhaven Asset Management’s Michael Pausic and Nick Lawler.
Let’s take a look at why these investors might think Alphabet is an attractive investment.
Alphabet is attracting investor interest
One of the first things that catches the attention of hedge fund managers is valuation. Alphabet is trading at a pretty big discount compared to many other AI-related stocks, with a price-to-earnings (P/E) ratio of just 23.6 times. A number of rivals are trading at more than 35 times.
Furthermore, that is below the multiple that Alphabet historically traded at before the pandemic, while often trading above a price-to-earnings ratio of 30 times.
That gives Alphabet’s stock room to move higher, but the valuation alone isn’t a reason that reputable hedge fund managers would buy the stock.
An investment in Alphabet is an investment in a company that has two dominant companies with Google and video platform YouTube. Google is a near monopoly with an estimated share of around 90% of global search results. While there are some fears that AI will impact its search operations, the company is embracing the technology and implementing AI overlays at the top of page results to answer more complex queries.
Alphabet will look to new ad formats to monetize its latest AI efforts to drive growth. Since only about 20% of search results contain 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 isn’t currently making money from.
Alphabet’s YouTube platform should also not be overlooked. While many streaming services fall outside this scope Netflix where they struggle to be profitable due to the cost of content, the revenue sharing model Alphabet uses with creators has long alleviated these problems. Meanwhile, the company has a big opportunity to capitalize on short-form videos that compete with TikTok, which it is just starting to monetize. If its competitor is banned in the US, it could be a big opportunity for the company.
Moreover, Alphabet’s cloud computing business is still in the early days of ramping up profitability. Given the company’s high fixed costs, profitability should now grow much faster than revenue, which will be driven by AI adoption.
Should retail investors follow suit and buy Alphabet?
Alphabet is a relatively cheap stock with a dominant position in search results and great opportunities in the field of AI. While the stock has had a strong year, up about 27% this year, it’s not too late to follow hedge fund billionaires in the stock.
The company has a long road of growth ahead of it and multiple expansion potential (which is an increase in valuation multiples, such as price-to-earnings ratio). Together this is a powerful combination and makes the stock a buy.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool holds positions in and recommends Alphabet, Netflix and Nvidia. The Motley Fool has a disclosure policy.
Billionaires Are Selling Nvidia, Buying These Stocks Instead was originally published by The Motley Fool
