We recently published a list titled Forget Magnificent 7: Analysts are Talking About ‘Big 10’ AI Stocks in 2024. Since Alphabet Inc. (NASDAQ:GOOG) ranks 5th on the list, it deserves a deeper look.
When the AI revolution started with the launch of ChatGPT, investors started pouring money into a handful of companies that are leading AI technology development, thanks to their industry position and unending free cash flows. Market analysts soon started pointing to the concentration of gains phenomena in the market, where just a few stocks accounted for most of the broader market gains. This tech concentration remains strong as of today, as all important AI and Cloud technologies that we see in the news are developed, acquired or marketed by mega-cap tech companies we’re all familiar with. Bank of America analyst Michael Hartnett recently said in a report that the S&P 500 has gained about 12% so far in the year, but if we remove 10 technology companies from the equation, these gains shrink to just 3.6%. Hartnett calls these companies the “AI Big Ten” group.
What about the Magnificent Seven group of stocks that kept making headlines in 2023 and early 2024? Hartnett calculated that the broader market gained just 4.9% so far this year if these seven stocks are taken out of the equation. There is a third group of stocks that most investors are unaware of: Hedge Fund Top 30. These 30 stocks include the Magnificent Seven as well as 23 other promising stocks. These 30 stocks returned 53.2% in 2023, 20.2% during the first 5 months of 2024 vs. 11% for the S&P’s large cap index. You can check out the latest list here: 31 Most Popular Stocks Among Hedge Funds.
In this article we will take a look at the Big 10 AI stocks Bank of America analyst Michael Hartnett highlighted in his report. With each stock we have mentioned the number of hedge fund investors, as of the end of the March quarter. 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).
Alphabet Inc (NASDAQ:GOOG)
Number of Hedge Fund Investors: 165
BofA also named Alphabet Inc. (NASDAQ:GOOG) as one of the Big 10 AI stocks that are contributing to the overall market returns so far. The stock has gained about 28 so far this year.
Another latest story around Alphabet Inc Class C (NASDAQ:GOOG) making waves is Bank of America’s industry checks in the search engine market which found that Alphabet is still the market leader, with a whopping 95% share, with Bing’s search coming in at just 0.7%.
BofA’s Justin Post said Alphabet Inc’s (NASDAQ:GOOG) AI Overviews had a role to play here:
“After a consecutive eight months of decline, Google’s US Search market share increased m/m in May, which could suggest AI Overviews are aiding query growth and usage,” Post said.
Alphabet Inc. (NASDAQ:GOOG) bulls believe the market is not incorporating Alphabet Inc.’s (NASDAQ:GOOG) growth in Cloud, Other Bets, Video and other high growth initiatives. The stock is trading 20x Alphabet Inc.’s (NASDAQ:GOOG) 2025 EPS estimate of $8.57. This multiple makes the stock look attractively valued since the Wall Street expects Alphabet Inc. (NASDAQ:GOOG) earnings to grow by 13.40% in 2025 and by 19% over the past five years on a per annum basis.
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, Qualcomm Inc (NASDAQ:QCOM) ranks 10th on Insider Monkey’s list titled Forget Magnificent 7: Analysts are Talking About ‘Big 10’ AI Stocks in 2024. While we acknowledge the potential of Qualcomm Inc (NASDAQ:QCOM), 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 Qualcomm Inc (NASDAQ:QCOM) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.
Disclosure: None. This article is originally published at Insider Monkey.
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