Many savvy technology investors and entrepreneurs agree: the AI revolution is the real deal and will likely change our lives in the coming years. But unlike other disruptive revolutions, this revolution is actually likely to benefit many established tech giants. These powerful companies are, after all, the only ones with the vast financial war chests and diverse technology know-how to deploy this extremely expensive and difficult technology at scale.
It’s no wonder the Magnificent Seven Stocks have been on a tear lately. But while AI chip leaders Nvidia (NASDAQ:NVDA) Although the company is getting most of the attention, its stock has also risen into the stratosphere and is trading at a high valuation for a chip stock.
That’s why billionaire hedge fund manager Dan Loeb is instead placing a new AI bet on one of the cheapest Mag Seven stocks.
Third Point invests in Alphabet in the first quarter
In his first quarter letter to shareholders, Loeb explained the company’s new purchase alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) as a cheap way to play the AI race.
It should be noted that Loeb also said that AI-related betting represented about half of Third Point’s holdings today. So Loeb is clearly bullish on this strong trend, which accelerated after ChatGPT debuted in November 2022.
The problem, of course, is that AI stocks are rarely cheap these days. But as Loeb outlined in his Q1 letter, Google’s initial missteps in launching its large language model Gemini, which aims to compete directly with ChatGPT, presented this opportunity.
Gemini’s highly anticipated launch in February didn’t quite go as planned. When Gemini was asked by early users to create historical images, they often depicted racially diverse figures in historical settings where this was not historically accurate, and these politically motivated inaccuracies were widely publicized. In response, Google shares fell to their lowest level since the beginning of the year in early March.
However, Loeb wrote in his letter:
By prioritizing a small operational misstep while downplaying the fact that the company has been building world-class AI capabilities for over a decade, it created an attractive entry point for a long-term investor. While it’s easy to forget that the original Transformers paper that paved the way for the rise of LLMs was published by Google engineers, and that it was Alphabet that built two of the leading AI research organizations (Google Brain and DeepMind), as News reports are previewed Apple‘S (NASDAQ:AAPL) Investors paid attention to the intentions to embed Gemini in iOS. We believe the moment is approaching for Gemini to take a seat at the economic table.
Not only does Loeb expect Alphabet’s AI team to ultimately solve the problems in Gemini to make it a standout LLM. Loeb also points out that AI has the potential to significantly improve Alphabet’s current core businesses in search, YouTube, Android, cloud and others. And rather than being threatened by AI, Loeb believes Google search could actually be equalized more a trusted source of information as the post-AI internet is full of “ad-supported content full of fakes.”
The bet pays off
Loeb had good reason to lay out Third Point’s alphabet position in the first quarter. Five days before publishing his letter, Alphabet reported first-quarter profit that significantly beat analysts’ expectations. In addition, the company announced its first-ever dividend payment, which corresponds to a dividend yield of 0.5% at this share price.
The dividend payment was interesting as management showed confidence in its growth trajectory while recognizing the company’s newfound focus on operational efficiency since the downturn in 2022.
In any case, Alphabet rebounded after the April 25 release and is now up about 20% year over year and about 25% above March lows.
What Alphabet Stock Looks Like After the Rally
Even after the recent rally, Alphabet trades at less than 26 times trailing earnings and just 21 times its 2025 earnings estimates. This is still one of the cheapest stocks in the Magnificent Seven. Additionally, Alphabet has a hefty cash pile of $108 billion and is still losing over $1 billion in the Other Bets segment every quarter.
Leaving these two factors aside, Alphabet’s core Search, YouTube, Android, and Cloud businesses are trading at an even cheaper valuation than Alphabet’s overall P/E ratio suggests. In this Alphabet shareholder’s opinion, investors would do well to follow Loeb into the stock for the long term.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Billy Duberstein has held positions at Alphabet and Apple. Its customers can own shares in the companies mentioned. The Motley Fool has positions in and recommends Alphabet, Apple and Nvidia. The Motley Fool has a disclosure policy.
Move Over, Nvidia: Billionaire Dan Loeb is betting on this dividend-paying “Magnificent Seven” stock to win the artificial intelligence (AI) race. Instead was originally published by The Motley Fool