In a presentation this summer, Coatue Management, headed by billionaire fund manager Philippe Laffont, laid out its case for what it sees as the next group of tech leaders. Unsurprisingly, it sees artificial intelligence (AI) as a massive driving force, improving productivity and profits over time. Based on growth expectations for public and private companies, the investment team developed a list of 40 top opportunities for growth investors over the next five years called the Coatue Fantastic 40.
There were some notable absentees from the list, but one stuck out in particular, considering Coatue holds shares in the company. Alphabet (GOOG 0.28%) (GOOGL 0.15%) was nowhere to be found on the Fantastic 40.
Coatue didn't provide an exact reason why Alphabet didn't make the list back in the summer, but the team seems to have had a change of heart. It updated the list in mid-October, and Alphabet is now near the top of the Fantastic 40.
Image source: Getty Images.
Is Alphabet a winner or loser in the AI era?
While Coatue didn't provide an explicit reason why Alphabet didn't make the list this summer, its presentation provided a significant clue. In one slide, Laffont points to the rapid adoption of paid subscriptions for AI services like ChatGPT since 2022. It noted a positive inflection point at the start of 2025 as reasoning models emerged, providing a significant step up in generative AI capabilities.
On the next slide, he shows that when someone signs up for the paid version of ChatGPT, their page views on Google decline. He notes that Google page views had been climbing about 4% per year; however, nearly two years after signing up for ChatGPT, page views for that person decline about 8%.
Coatue is the first group to show a direct link between signing up for ChatGPT and declining Google usage, but others have pointed out the impact of the rise of AI chatbots on Google search volume. Apple's head of services Eddy Cue testified that the company saw a decrease in search volume on its Safari web browser earlier this year.
NASDAQ: GOOG
Key Data Points
There are a few things that could skew the data. First of all, Google has been pushing users to its native app instead of using Google in the mobile web browser on their phone. That could negatively impact the page-view numbers Coatue and Apple see.
Second, changes to Google's search-results pages could also have an impact. If Google is more efficient at surfacing relevant results, users don't need as many page views. That could be heavily influenced by its new AI Overviews feature, which creates an AI-generated answer to search queries based on top search results.
So far, Alphabet hasn't seen much negative financial impact. In fact, Google Search revenue growth accelerated in the second quarter, climbing 12% year over year. Management says its seeing strong engagement from users, thanks, in part, to AI-powered features like Overviews.
Why Alphabet deserves a spot in the Fantastic 40
There are several developments that may have led to Laffont and his team's change of heart on Alphabet. The company was able to shed a massive potential headwind last quarter when a federal judge proposed remedies for its antitrust ruling that were less severe than feared. Alphabet will have to make a few changes to the way it partners with other tech companies but won't have to divest any of its valuable assets, like the Chrome web browser.
Moreover, Alphabet is showing excellent progress in fighting back against ChatGPT and other AI chatbots. Data from Similarweb shared by hedge fund manager Chamath Palihapitiya show Google Gemini's massive traffic share gains against ChatGPT over the past year. Palihapitiya says this points to a significant advantage for incumbent tech platforms like Google -- distribution.
Google has taken steps to push Gemini to more users. It introduced "AI Mode" earlier this year, integrating the Gemini interface into the standard Google user experience. It also made it easily accessible in Chrome. With nine different applications with over 1 billion users (six with over 2 billion users), Alphabet can drive a lot of traffic to Gemini. That can certainly make up for declining Google Search traffic.
While Search is Alphabet's cash cow, the company is seeing a tremendous benefit from AI spending on Google Cloud. The cloud computing segment is growing more than 30% year over year and is seeing strong operating leverage, with operating margin expanding to 21% last quarter. Based on larger competitors, there's still a lot of room to expand that margin.
Lastly, shares of Alphabet are still relatively cheap, compared to other AI stocks. Its forward price-to-earnings ratio (P/E), which is below 26, leaves room for multiple expansion relative to the overall market. As a result, it's a good bet that Alphabet can produce excellent results for investors over the next five years, and its position in Coatue's Fantastic 40 is well deserved.
