America's billionaire fund managers are living proof that the stock market is an incredible wealth generator over the long term. Many of them continue to invest today, and their hedge funds, family offices, and holding companies are required to report their positions each quarter, making it easy for everyday investors to follow their lead.
Steven Cohen (net worth $19.8 billion), Stanley Druckenmiller (net worth $6.2 billion), and Bill Ackman (net worth $4.1 billion) each made most of their fortunes by investing their clients' money -- and their own -- in stocks and other financial assets.
The three billionaires are currently investing heavily in artificial intelligence (AI) stocks, and they have one holding in common.
Image source: Getty Images.
Cohen, Druckenmiller, and Ackman are betting on Alphabet
Alphabet (GOOGL +2.81%)(GOOG +2.77%) is the parent company of Google, which operates the world's leading internet search engine and the third-largest cloud computing platform. It's also home to streaming giant YouTube, and Waymo, a developer of autonomous self-driving vehicles.
As of the latest regulatory filings for the third quarter of 2023 (ended Sept. 30):
- Point72 Asset Management, which is run by Steve Cohen, owned 552,101 Alphabet Class A shares and 105,374 Class C shares worth a combined $86 million.
- Duquesne Family Office, which is run by Stanley Druckenmiller, owned 838,375 Class A shares worth $109 million.
- Pershing Square Capital Management, which is run by Bill Ackman, owned 4.3 million Class A shares and 9.3 million Class C shares worth a combined $1.8 billion.
Google is the window to the internet. It has a 91% market share when it comes to search, so it's fair to say it can access more data than almost any other platform (of any kind) in the world. Data is the nectar of any AI model, which is why Alphabet is quickly becoming a leader in the emerging AI industry.
Alphabet stock is remarkably cheap right now, and here's why investors should take this opportunity to buy in.
NASDAQ: GOOGL
Key Data Points
Alphabet is developing industry-leading AI models
At the beginning of 2023, one of Alphabet's tech-sector rivals, Microsoft (MSFT +0.17%), announced a $10 billion investment in OpenAI, a leading AI start-up and ChatGPT creator. The chatbot can create text, images, videos, and even computer code, and Microsoft immediately started integrating it into its product portfolio.
The integration of ChatGPT into Microsoft's Bing search engine grabbed the most attention early on, because investors feared it would become a viable competitor to Google -- after all, with a 91% market share, it had everything to lose. Traditional search engines require the user to sift through web results for the information they seek, whereas a chatbot provides direct responses, which is far more convenient.
But Alphabet has worked on AI for years, even if its product portfolio wasn't overtly reflecting it prior to 2023. It allowed the company to quickly launch a ChatGPT competitor called Bard, and it has since released an even more advanced model called Gemini.
The latter is more powerful than OpenAI's latest GPT-4 models by most multimodal benchmarks. In other words, Gemini's ability to understand, interpret, and generate text, images, videos, and code is more advanced.
Alphabet is in the process of monetizing its AI models by weaving them into popular products like Gmail, Docs, Sheets, and Slides. Plus, the traditional Google search engine uses AI to deliver direct answers to queries by placing them at the top of the page, which creates a more convenient user experience.
Alphabet is generating record amounts of revenue
Alphabet will report its official full-year results for 2023 in late January. It's expected to have generated a record-high $305 billion in revenue with $5.74 in earnings per share, representing year-over-year growth of 8% and 25%, respectively.
Advertising revenue generated by Google Search and YouTube rebounded in the most recently reported third quarter (ended Sept. 30), after businesses spent much of 2022 and early 2023 cutting their budgets in the face of elevated inflation and rising interest rates.
Google Cloud remains the fastest growing segment for Alphabet, and it's a big point of focus for investors. That's because AI will eventually touch every aspect of our lives, and the majority of the applications we will use in the future will be developed in the cloud. Operators of centralized data centers (like Google Cloud) have been preparing for this shift by building AI infrastructure.
That infrastructure runs on leading AI data-center chips from providers like Nvidia. But Google has been developing its own chips like the new TPU v5p it released in December. It's a tensor processor designed to speed up the training of AI models, and the company says it was used to develop Gemini.
Google Cloud also offers business customers more than 100 third-party large language models (LLM), which are the building blocks of AI applications. Developing an LLM from scratch takes considerable time, data, and financial resources, so using a ready-made solution can accelerate the adoption of AI for businesses.
Image source: Getty Images.
Alphabet stock is cheap
Investors love a good deal, and successful billionaires like Cohen, Druckenmiller, and Ackman know how to spot one.
While Alphabet's full-year results for 2023 are still pending, its $5.74 in expected earnings per share (EPS) would place its stock at a price-to-earnings (P/E) ratio of 24.8. For perspective, the Nasdaq-100 technology index -- which is home to all of Alphabet's big-tech rivals -- trades at a P/E ratio of 30.1. Therefore, Alphabet stock trades at a 17% discount to its peers.
Microsoft stock trades at a P/E ratio of 37.6, so Alphabet stock would have to soar 51% just to catch up. I'm not suggesting it will, because Microsoft's cloud business is substantially larger than Alphabet's, and that's where investors appear to be attributing the most value. However, there is certainly scope for Alphabet to trim the gap.
Alphabet is set for another record year of revenue and earnings, according to Wall Street's 2024 estimates, so it isn't too late to buy the stock.
