We recently published a list of 7 Best AI Value Stocks That are ‘Money Machines’ According to NYU’s Aswath Damodaran. Since Alphabet Inc. (NASDAQ:GOOG) ranks 5th on the list, it deserves a deeper look.
Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University. His thoughts on economy and stock valuations are given a lot of weight by analysts. Damodaran in his recent interview with CNBC said that Magnificent Seven stocks have become the “value stocks for investors who care about earnings and cash flows.”
“We look at the last year and a half, they’ve added $8.8 trillion in market cap… just these seven companies. Just to give you perspective, the second-largest market in the world, China, has a market cap of $12.1 trillion. These seven stocks alone have added more in market cap than the entire German market, the French market, the Swiss market.”
Damodaran’s comments are important because he’s been repeatedly saying in the past that major technology companies are fully or overvalued. In September, he said on CNBC that if you go through the list of top tech stocks, “you are more likely to be overvalued than undervalued.”
But in his latest interview, Damodaran said that before we “dismiss” Mag. 7 stocks as “risky tech companies,” we should keep in mind that “these are the money machines in this market.”
However, when asked whether he believes we are not in any kind of “danger zone,” the professor said we are in the danger zone not just in terms of these seven stocks, but the market overall.
In this article we take a look at the Mag 7. stocks and their AI-related growth catalysts. With each stock we have mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Pixabay/Public Domain
Alphabet Inc Class C (NASDAQ:GOOG)
Number of Hedge Fund Investors: 165
Alphabet is a key part of the Mag. 7 group of stocks which Aswath Damodaran believes are money machine value stocks.
Alphabet Inc. (NASDAQ:GOOG) bulls believe the company is just getting started with AI product launches. Alphabet Inc. (NASDAQ:GOOG) is indeed in a strong position to develop an AI ecosystem around its products. For example, demos have shown that Gemini app will help people perform daily personal tasks like note taking, appointments, writing, etc. These features could easily be integrate with other Google apps. Alphabet Inc.’s (NASDAQ:GOOG) app is to urge users to sign up for ‘Google One AI Premium’ plan, which has a $19.99 price tag. Google saw advertising revenue accelerate in Q1 2024, boosted by YouTube in particular growing by almost 21% last quarter. Analysts also believe Alphabet Inc. (NASDAQ:GOOG) is in a strong position to offset any headwinds or lost market share in Google search with YouTube, which saw its ads revenue reach $8.1 billion in the first quarter, a 21% growth. Alphabet Inc.’s (NASDAQ:GOOG) net income in the period came in at $23.66 billion, up 57%, or $1.89 per share.
Oakmark Global Select Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q2 2024 investor letter:
“Alphabet Inc. (NASDAQ:GOOG) was the top contributor during the quarter. The stock price rose after the U.S.-based communication services company reported first-quarter operating income growth of 31% versus the prior year. We believe management’s cost reduction initiatives will improve operating efficiency and lead to faster earnings growth. In addition, we expect the company’s new AI-powered features showcased at the recent Google I/O conference will increase the value of its products to users. At the current share price, we continue to see upside to our estimate of Alphabet’s intrinsic value.”
Lakehouse Global Growth Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its April 2024 investor letter:
“Alphabet Inc. (NASDAQ:GOOG) delivered a strong quarterly result that came in well ahead of analysts’ expectations. Revenue grew 15.4% (16.0% constant currency) to $80.5 billion and operating income grew 46.0% to $25.5 billion. Revenue growth accelerated across Search, YouTube Ads, and Google Cloud, all whilst the company delivered its highest operating margin since 2021 – showing meaningful progress in the company’s efforts to durably re-work their cost structure. On the Generative AI front, management emphasised the company’s infrastructure advantages including 5th generation TPUs(chips developed by Google specifically for AI training and inference), high performance data centre architecture, and AI models that are 100x more efficient versus 18 months ago. Overall, we believe that Alphabet is well placed for the AI opportunity ahead and still has significant latent earnings power. When combined with a relatively undemanding valuation of 21x forward net profit and over $100 billion of cash on the balance sheet, it’s not hard to see why we remain positive on the range of outcomes in the years ahead.”
Overall, Alphabet Inc. (NASDAQ:GOOG) ranks 5th on Insider Monkey’s list titled Jim Cramer’s Latest Portfolio: Top 10 Stocks in July. While we acknowledge the potential of Alphabet Inc. (NASDAQ:GOOG), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than Alphabet Inc. (NASDAQ:GOOG) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.