What happened
Shares of Alphabet (GOOG 10.17%) (GOOGL 10.44%) rose as much as 3.6% in Tuesday trading before settling into a 2.7% gain for the day, as the overall market was down.
Today's move follows on a streak for the search leader, in which Alphabet has rallied by double digits in May. The company had already received a nice bounce following its I/O conference on May 10, during which management showcased new devices and updated investors on the extent of its AI investments.
Alphabet had sold off in the first quarter amid fears that OpenAI's ChatGPT could be incorporated into Microsoft's (MSFT 2.35%) rival Bing search engine, potentially disrupting Google's dominant search franchise. However, it appears that at least several well-known hedge fund managers didn't buy into those fears.
So what
It's 13F season, that time of the quarter in which leading hedge funds disclose their buys and sells from the prior quarter.
In the first quarter, Alphabet suffered a barrage of questions around how AI might pose a threat to its businesses. Matters weren't helped at all when the company made a hastily put-together demonstration of its ChatGPT competitor Bard on Feb. 8. The chatbot gave a wrong answer at the demonstration, upon which Alphabet's stock fell.
But it looks as if several prominent hedge fund managers who practice value investing thought those fears were far overdone, and scooped ups shares on the dip.
That roster of managers looks like a who's who of famous value investors, including Baupost Group's Seth Klarman, who wrote the book Margin of Safety; Appaloosa's David Tepper; and Point72's Steve Cohen, all of whom boosted their stakes in Alphabet in the first quarter.
Perhaps the most notable buy came from Pershing Square Holdings' (PSHZ.F 1.16%) Bill Ackman, who runs the most concentrated, high-conviction portfolio of them all. In the first quarter, Ackman initiated a new position in Alphabet, with the purchase of both A and C shares combining to make up 10.4% of Pershing Square's portfolio at the end of the first quarter.
The buy-in from several famous hedge fund managers might be helping Alphabet rise above the market today.
Certainly, it is not exactly a slouch when it comes to artificial intelligence (AI), especially after it acquired DeepMind in 2014. At its recent I/O conference, CEO Sundar Pichai highlighted several AI innovations, noting that AI features were used 180 billion times in Google Workspace last year.
Pichai also unveiled PaLM, the company's newest large-language model used for generative AI, which can write computer code, translate 100 languages, and is now powering the oft-maligned Bard.
Apparently, that update sparked some enthusiasm among investors that Alphabet won't get left behind by Microsoft amid the platform shift of generative AI. Meanwhile, today's news of buy-ins from large hedge funds is also lending confidence.
Now what
While the recent rally has been nice for Alphabet shares, which had fallen behind some of its FAANG peers since the beginning of the year, the disruptive potential of AI is just beginning. That could mean ongoing risks for the company if it doesn't execute on its AI products amid fiercely competitive new rivals.
On the other hand, the potential of AI could also lead to new opportunities, especially for Alphabet's cloud division, which turned a profit for the first time ever last quarter. Investors might not be able to just sit back and buy-and-forget the stock without worry, but there could also be more upside than downside in the age of AI.
