Each quarter, institutional investors are required by the Securities and Exchange Commission (SEC) to file a 13F form. This is a document that outlines all of the stocks investors such as hedge funds are buying and selling. It can be a useful tool to see where smart money is moving.
Like hedge funds, corporations can also take positions in other companies. Internet search giant and artificial intelligence (AI) leader Alphabet has built a pretty impressive portfolio of its own.
While parsing the company's 13F, there was one transaction in particular that stuck out to me. So much so, that I think Alphabet may have just identified its next acquisition candidate.
Let's explore what company Alphabet is aggressively investing in, and why an acquisition doesn't seem out of the question.
Alphabet's massive purchase during the first quarter
Most of Alphabet's holdings in public companies are in the healthcare and technology industries.
Some of Alphabet's major positions include cybersecurity company CrowdStrike, workplace productivity software business UiPath, as well as Verve Therapeutics.
During the first quarter, Alphabet scooped up 7.1 million shares of software development platform GitLab (GTLB -2.96%). GitLab is now Alphabet's largest public company position, and Alphabet is the biggest institutional investor in GitLab with a 7.4% ownership stake.
Image source: Getty Images.
Why might Alphabet acquire GitLab?
One of the most common alternatives to GitLab is a similarly named business called GitHub.
GitHub was acquired by Microsoft back in 2018 for roughly $7.5 billion in stock. At the time of the deal, GitHub had a reported 28 million developers and was generating around $200 million to $300 million in annual recurring revenue.
Today, it's estimated that GitHub has 100 million users and is generating $1 billion in revenue. According to Microsoft' latest earnings report, 90% of Fortune 100 companies use GitHub.
One of the biggest reasons for this meteoric growth in GitHub is AI. The platform is playing a crucial role for Microsoft Copilot, the company's AI-powered workplace productivity tool and smart assistant.
Considering that Alphabet competes with Microsoft across growth markets in cloud computing and software productivity platforms, it's not unreasonable to think GitLab will end up as a primary feature in the company's Gemini AI model.
Moreover, according to media outlets, Alphabet was considering acquiring GitHub but ultimately lost out to Microsoft.
Personally, I do not see Alphabet's recent purchase of GitLab as a mere opportunity to strike a strategic partnership. Given Alphabet's rivalry with Microsoft, the fact that it failed to acquire GitHub, and GitHub's undeniable contribution to Microsoft's AI growth, I am speculating that in the coming months Alphabet will strengthen its relationship with GitLab.
Moreover, I think developers will begin to see more functionality in Gemini promoting GitLab. Should this prove successful, I think Alphabet could end up outright acquiring GitLab sooner than later.
The bottom line for investors
It's important to keep in mind that the ideas explored in this piece are my own opinion. I cannot say for certain whether or not Alphabet is considering acquiring GitLab or any other company at this moment.
For these reasons, I would caution against buying GitLab stock based on speculation of a takeover. Investing in GitLab should be rooted in conviction surrounding AI, as well as the company's growth prospects.
So far this year, shares of GitLab have cratered over 30%. While the company has done a solid job increasing revenue, sustained profitability remains an issue. In a way, these financial inconsistencies further support my thesis of Alphabet acquiring GitLab.
With shares of GitLab on the decline, Alphabet might able to complete an acquisition at an attractive price point while easily integrating GitLab's functionality across its ecosystem. At the same time, I think Alphabet could generate some significant cost synergies and turn GitLab into a profitable operation.
Nevertheless, I think an investment in GitLab right now may not be the most prudent idea given the financial shape of the company compared to larger, more established opportunities in the AI arena.
