Checking out what billionaires own is a smart investment strategy. They often have teams of analysts working for them to ensure they're invested in the best stocks. This especially rings true for a massive movement like artificial intelligence (AI), which can potentially shape the world for decades to come.
One stock most commonly held among the 16 billionaire hedge funds that The Motley Fool analyzed was Alphabet (GOOG 1.16%) (GOOGL 1.13%). This stock was owned by 11 of the 16 billionaire hedge funds and tied (with Meta Platforms) for the most commonly owned among the group.
Why is Alphabet such a popular pick in the AI realm? It's mainly due to its balanced approach to AI.
Alphabet's AI integration is impressive
Alphabet is participating in the generative AI arms race in multiple ways. The first is its Google Gemini AI platform. Gemini emerged as one of the top options in the space and has seen massive use in many industries. However, the biggest way it's being used is by Android smartphone users, as it's the native generative AI app thanks to Alphabet owning the Android operating system.
Gemini is also integrated throughout Google's advertising services and has become a useful tool for many advertisers to quickly develop an ad campaign that may have taken significantly longer without the platform. This is critical, as advertising still makes up the majority of Alphabet's revenue, with 75% of its total Q3 revenue coming from advertising sources.
Cloud computing is a massive part of the AI arms race that isn't talked about enough. While some of the biggest AI competitors have access to nearly unlimited computing power, most competitors don't. To keep their costs down, they rent that computing power from a cloud computing provider like Google Cloud. This led to massive growth for Google Cloud, which saw revenue rise 35% year over year in Q3.
If you look at how Alphabet integrates AI into its inner workings, it's clear why Alphabet is a top pick among billionaire hedge funds. Alphabet is integrating AI into its various platforms to ensure that its existing businesses stay on top versus the competition. This doesn't require Alphabet to win the AI arms race outright; it just gets to cash in on the massive trend.
However, the stock isn't highly valued because Google Gemini is often seen as a second-place finisher to competition like ChatGPT. I think this is a huge mistake by the market, as most of the value from generative AI will come from how companies integrate AI into their services, and Alphabet has done extremely well at that.
Alphabet's stock looks like a bargain buy right now
Alphabet's stock is valued pretty cheaply compared to its peers and the broader market. You can scoop up shares for 26 times trailing earnings, or just 22 times forward earnings.
GOOGL PE Ratio data by YCharts
For reference, the S&P 500 trades at 25.6 times trailing earnings and 22.6 times forward earnings. This indicates that the market values Alphabet as it does an average stock in the S&P 500, even though its track record and growth clearly indicate that to be a false assumption.
Alphabet is one of the cheapest ways to play the AI investment trend, and it's no wonder it's a top holding among billionaire hedge funds. I think it's a top buy now, and this list of other AI stocks owned by billionaire hedge funds is a great place to find other ideas as well.
I think Alphabet has a chance to be a top-performing stock this year, and investors should consider scooping up some shares now while they're still on sale.
