Billionaire Daniel Loeb of Third Point Management is known as a value investor, and last quarter he was picking up shares of beaten-down tech giant Alphabet (GOOGL -0.74%) (GOOG -0.64%). Alphabet's stock is down about 13% year to date as of this writing, as investors worry about the future impact of artificial intelligence (AI) on its search business.
However, Loeb has a different view and bought $453 million worth of Alphabet stock in the quarter. Here's why.
Why Loeb was buying Alphabet
Loeb wrote exactly why he was buying Alphabet stock in Third Point's first-quarter letter to investors. These investment letters are common in the hedge fund industry and give investors a quarterly update on a fund's investment performance. Portfolio managers will also often highlight a few investment ideas or talk about the current investing or macro environment in these letters.
In his letter, Loeb told investors that he made a significant investment in Alphabet in the quarter, while acknowledging the market's worry about AI search and chatbots on Google search. He said that this concern is not entirely unfounded, but that Alphabet has advantages that are being overlooked.
The first big advantage Loeb noted that Alphabet has is distribution. While he did not go into the particulars, this can be seen in several areas. First and foremost, the company is currently the default search engine on billions of devices. It provides the operating system for Android devices, which use its search engine. Android is estimated to power around 70% of the world's smartphones.
Alphabet also owns the world's most widely used search browser, Chrome, where it is also the default search engine. In addition, it currently has a revenue-sharing search deal to be the exclusive search engine on Apple devices. This gives it access to another nearly 30% of the market not powered by Android. It also has revenue-sharing deals with other browsers, such as Opera.
In addition, Alphabet owns one of the world's largest advertising networks. It really can't be underestimated how much time and effort the company has put into developing its local ad presence. While AI companies are still trying to figure out the best way to monetize their offerings, Alphabet can connect advertisers with consumers on everything from a global to a local level. This is a huge monetization advantage over competitors.
The second big advantage Loeb said Alphabet has is technology. He noted that some initial Gemini AI model blunders caused investors to forget that Alphabet has been building out its AI capabilities for over a decade. He highlighted that a paper by Google engineers paved the way for the widespread use of large language models (LLMs), while the company has two leading AI research organizations in Google Brain and DeepMind. He believes that Alphabet is close to beginning to monetize Gemini in a meaningful way.
As for the impact on Google search, Loeb envisions a world where generative AI takes content creation costs to near zero, leading to more internet content, whether it be articles, entire websites, or video. However, with this increased content, it will become more difficult and expensive for businesses to stand out and attract customers. In a world flooded with low-quality and fake AI-generated content, he thinks Google Search will become even more valuable as a source of truth.
Loeb said he is also encouraged by Alphabet's recent cost discipline and how it is taking a tougher stance on employee protests. Back in 2018, Alphabet had canceled a large military AI project, Project Maven, due to employee protests -- and Palantir Technologies would take over the project as a result.
Image source: Getty Images.
Is Alphabet stock a buy?
While there is a Google search disruption risk, Loeb lays out a nice argument as to why he does not think this will happen and why Alphabet will be an AI winner. I also think it's important to note that traditionally the company only serves ads on 20% of its search queries. Even if AI shrinks overall search queries, it could ultimately make them more valuable to advertisers. At the same time, with its large ad network, Alphabet should also be able to find new ways to monetize things like AI Overviews, expanding its overall search revenue opportunities.
And of course, Alphabet is also about much more than search. It also owns the most-watched streaming platform in the world and the third-largest cloud computing business. Cloud computing, in particular, has been a big growth driver for the company, and it is investing heavily to keep up with the growing demand for its services. Its Waymo robotaxi business is also growing rapidly and has the potential to be its next big business.
Trading at a forward price-to-earnings ratio (P/E) of 17 times 2025 analyst estimates, the stock is in the bargain bin, making it an attractive option to buy at current levels.
