When looking at hedge funds run by billionaires, it's clear there are a few tech stocks that are favorites across the board. After The Motley Fool analyzed 16 hedge funds run by billionaires, it found that these billionaires commonly owned two tech stocks: Alphabet (GOOG 1.06%) (GOOGL 1.08%) and Meta Platforms (META -0.28%). Out of the 16 hedge funds, 11 of them owned both or either stock, making them quite popular.
With so many billionaires confident in the performance of these two businesses, investors should take notice, as they could be smart picks for your portfolio, too.
Advertising is a key part of each business
The core business behind both companies is the same: advertising. Meta Platforms advertises on its social media sites Facebook, Instagram, Threads, WhatsApp, and Messenger. Alphabet's ads are run on multiple platforms, including the Google search engine and YouTube. Both companies have the top-performing platforms in their respective categories, making them vital partners in the advertising business.
Advertising can be a cyclical industry, as companies will cut their ad spending if they fear a recession is on the horizon. This was the prevailing thought last year as both Alphabet and Meta struggled to grow their ad revenue meaningfully. However, that's not the case this year -- both companies' ad businesses are booming.
In Q1, Alphabet's advertising revenue rose 13% to $61.7 billion. YouTube had a strong quarter in particular, with its ad revenue rising 21% to $8.1 billion.
Meta posted even stronger Q1 results than Alphabet. Meta's advertising rose 27% to $35.6 billion.
Advertising is clearly doing well, so both businesses are executing at a high level. This is partly why both stocks are widely owned by hedge funds, as the various managers saw the dip in the ad market and knew it would recover. This investment strategy has largely paid off, as both Meta and Alphabet are up around 20% in 2024.
But there are other reasons to buy both companies.
Each company has other bets that could pay off massively
Artificial intelligence (AI) has been a key focus area for Meta and Alphabet over the past few years. While each company primarily uses it to improve its advertising prowess, other projects benefit from their AI research.
Meta is working to integrate its AI assistant with its glasses, as it believes that such products will become a mainstream way for consumers to utilize AI assistants. While the ultimate goal is to integrate a holographic display in these products, Meta is seeing immense popularity in products like the glasses it collaborated on with Ray-Ban. Time will tell if this venture is fruitful, but if it becomes a must-own consumer product, Meta will have opened up a brand new revenue stream.
Alphabet has many irons in the proverbial AI fire. First, Google Cloud is servicing many AI businesses. With 90% of generative AI unicorns (private companies valued at more than $1 billion) being Google Cloud customers, it's a clear choice for any company focusing on AI. Alphabet also has its generative AI model, Gemini. Gemini is competing against other players like ChatGPT and is being integrated into many of Alphabet's products.
Overall, both companies are executing at a high level, which makes them attractive stocks to buy as-is. However, considering that both stocks can be bought for around 22 times forward earnings, with the S&P 500 trading around 21 times forward earnings, they aren't overpriced.
META PE Ratio (Forward) data by YCharts
This means investors can confidently buy shares in each stock without fear of overpaying. There's a reason that billionaires love both of these stocks, and I think both belong in nearly every investor's portfolio.
