When Google restructured its business as Alphabet (GOOG 0.92%) (GOOGL 0.93%) it broke out its Other Bets segment from its core Google operations. While many investors are familiar with some of those other bets like Waymo (autonomous vehicles) and Verily (life sciences), the segment also includes a $7 billion investment fund called CapitalG.
CapitalG is a venture capital fund focused on growth-stage companies. Not only does it give these companies a cash infusion in the form of an equity investment, but it also gives them access to Google's expertise. That can be a huge advantage for a young company, and CapitalG has seen 16 of the companies it's invested in make an IPO.
On top of CapitalG, Alphabet holds investments in 43 publicly traded companies, which accounted for about $2.5 billion worth of its investment holdings as of the end of last quarter, according to filings with the SEC. And there are two beaten down publicly traded growth stocks the fund added to last quarter that may be worth a closer look.
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1. GitLab
Alphabet gave a substantial boost to its stake in GitLab (GTLB -1.59%) last quarter, increasing its total share count by 269%. It's now, by far, Alphabet's biggest public holding, amounting to approximately $550 million in value.
GitLab is code repository management platform similar to Microsoft's GitHub. It integrates numerous software development tools and makes it easy to maintain code, track issues, and maintain security to keep all your company's code private.
GitLab offers individuals its services for free, but charges for premium features or enterprise accounts. It counts more than 30 million users and 1 million active license users.
The free tier is essential to its land-and-expand strategy, which has been working well. It produced a dollar-based net retention rate of 130% in the fourth quarter, meaning existing customers were spending about 30% more on its services last quarter than the year before. The number of customers spending more than $1 million per year climbed to 96, up 52% year over year. Both helped it grow its top line 33% in the fourth quarter.
But management disappointed Wall Street with its guidance for fiscal 2025. The company expects revenue between $725 million and $731 million, resulting in EPS of $0.19 to $0.23. Those numbers came in below analysts' expectations and sent the share price down in March.
The stock valuation is high no matter which way you cut it. That makes the stock risky. But with strong revenue growth, super high gross margins, and demonstrable operating leverage in the business, it could rapidly grow earnings. Analysts covering the stock expect 38% annual growth over the next five years. While it's a somewhat risky investment, you'd have good company in Alphabet if you decide to add it to your portfolio.
2. Prime Medicine
Alphabet is one of the largest outside investors in Prime Medicine (PRME -10.00%), and it increased its share count in the company last quarter by 27%. Alphabet's 15 million shares give it a 12.55% stake in the biotech company.
Prime Medicine focuses on gene-editing therapies. It recently received FDA clearance to begin phase 1/2 study of its treatment for chronic granulomatous disease. It has several other treatments in the discovery or lead optimization portion of the development pipeline.
As such, Prime Medicine is pre-revenue, and investors are heavily focused on its cash burn rate and balance sheet. After offering additional shares of the stock to the public in February, the company ended the quarter with $210.7 million in cash and equivalents on its balance sheet. It holds an additional $13.5 million in restricted cash.
Over the past four quarters, cash burn has totaled about $200.6 million. What's more, that number is getting bigger as it ramps up R&D expenses related to new therapies in its pipeline. Unfortunately, Prime Medicine will in all likelihood burn through its existing cash runway before its chronic granulomatous therapy gets to market. That means, it'll have to raise cash again, likely through issuing new shares considering the current cost of debt.
Prime Medicine could produce some breakthrough treatments with its gene-editing process, but its finances are very precarious. That makes it a very risky investment that could have a lot of upside but just as much downside. Be mindful of your allocation if you choose to follow Alphabet and buy shares around the current price.
