The Google bulls are winning — at least for now.
Shares of the search giant’s parent Alphabet surged about 6 percent Wednesday, after the company beat second-quarter earnings forecasts and reported strong revenues from its cloud business. The stock is now up more than 50 percent for the year.
This year’s big upward move has taken several high-profile hedge funds by surprise. For example, in the first quarter, TCI Fund Management liquidated its entire stake of nearly 16 million Alphabet Series “A” shares and sold more than half its stake in the company’s “C” shares.
Valiant Capital Partners also fully unloaded its entire large stake of “C” shares, while other big sellers in the first quarter included quants Renaissance Technologies and Two Sigma Investments.
In his first-quarter client letter, Valiant’s Chris Hansen said that the introduction of ChatGPT and artificial intelligence had caused the firm to lose conviction about the longer-term thesis of both Alphabet and education technology provider Chegg.
“While we continue to think that Google possesses one of the best business mousetraps ever invented in search, and [although] it trades at a very reasonable multiple of earnings and cash flow, as a team we felt that the introduction of generative AI made it practically impossible for us to underwrite the strength of their search moat over even the intermediate term,” Hansen explained in the letter. (The firm’s second-quarter letter has not been sent to clients yet.)
Hansen added that there is still a strong possibility that Alphabet’s investments in AI and its dominant position in search may allow the company to emerge as a winner in generative AI and “maintain [its] massive search moat.” But he stressed that Valiant believes there are significant “innovator dilemma” risks “given the unparalleled profitability of [Google’s] current search business and the negative margin implications that a shift to generative AI search could pose.”
“Thus, even as our collective opinion is that they are likely to be one of the winners in AI, the uncertainty and downside risks [have] caused us to move on in favor of other longs,” Hansen added. “Thus, even as selling Google was a tough decision, I believe it is also a clear example of the intellectual flexibility necessary to be an effective investor.”
Others were much more optimistic.
Fellow Tiger descendant Coatue Management, for example, took a huge position in Alphabet’s “A” shares, while Hound Partners took a new large position in the company’s “C” shares, making it a top-10 holding. Tiger Global, meanwhile, more than doubled its position in the “A” shares, while Third Point established a new, 4.75-million-share stake in the same shares, making Alphabet the firm’s fifth-largest U.S.-listed long position at the end of the first quarter.
In his first-quarter letter, Third Point’s Dan Loeb told clients that “fears around the potentially negative impact that AI and ChatGPT/MSFT (Microsoft) may have on GOOGL’s business created a unique entry point into one of the best consumer internet assets and businesses of our generation. While ChatGPT has unquestionably captured the general public’s attention (as well as several hundred million users), we believe the market underestimates GOOGL’s own capabilities and opportunities in the emerging field of generative AI.”
