We recently published the following list: Forget the Magnificent 7: Analysts discuss 'Big 10' AI stocks for 2024. Alphabet Inc. (NASDAQ:GOOG) ranks fifth on the list, so it's worth taking a closer look.
When the AI revolution began with the launch of ChatGPT, investors began pouring money into a handful of companies that were leading AI technology development thanks to their industry position and endless free cash flows. Market analysts quickly began to point out the phenomenon of profit concentration in the market: just a few stocks account for most of the overall market profits. This technology concentration is still strong today, with every significant AI or cloud technology we see in the news being developed, acquired, or sold by a mega-cap technology company that everyone knows. In a recent report, Bank of America analyst Michael Hartnett noted that while the S&P 500 is up about 12% so far this year, if you exclude 10 technology companies, 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 stole the show in 2023 and early 2024? Hartnett calculated that if you excluded these seven stocks, the overall market would have risen only 4.9% so far this year. There is a third group of stocks that most investors don't know about: the top 30 hedge funds. These 30 stocks include the Magnificent Seven as well as 23 other promising names. These 30 stocks returned 53.2% in 2023 and 20.2% in the first five months of 2024. The S&P large-cap index returned 11%. You can find the latest list here. The 31 most popular stocks among hedge funds.
In this article, we look at the Big 10 AI stocks that Bank of America analyst Michael Hartnett covered in his report. For each stock, we include the number of hedge fund investors as of the end of the March quarter. Why are you interested in stocks that hedge funds are flocking to? The reason is simple: our research shows that you can beat the market by mimicking the top picks of the best hedge funds. Our quarterly newsletter strategy selects 14 small and large stocks each quarter and has returned 275% since May 2014, beating the benchmark by 150 percentage points. (Click here for details).
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 has contributed to the overall market return so far, with shares up about 28% so far this year.
Another recent story regarding Alphabet Inc Class C (NASDAQ:GOOG) is that Bank of America's industry research on the search engine market has revealed that Alphabet remains the market leader, with a staggering 95% share, while Bing has just 0.7% of searches.
BofA's Justin Post said Alphabet Inc's (NASDAQ:GOOG) AI Overviews plays a role here.
“After eight consecutive months of declines, Google's U.S. search market share increased month-over-month in May, which may suggest that AI overview is driving search growth and usage,” Post said.
Alphabet Inc. (NASDAQ:GOOG) bulls believe the market hasn't priced in the growth of Alphabet Inc.'s (NASDAQ:GOOG) cloud, other businesses, video, and other high-growth initiatives. The stock is trading at 20 times Alphabet Inc.'s (NASDAQ:GOOG) estimated 2025 EPS of $8.57. This multiple makes the stock look attractively valued, as Wall Street expects Alphabet Inc. (NASDAQ:GOOG) earnings to grow 13.40% in 2025 and 19% over the past five years.
In its April 2024 investor letter, Lakehouse Global Growth Fund said the following about Alphabet Inc. (NASDAQ:GOOG):
“Alphabet Inc.” (NASDAQ:GOOG) reported strong quarterly results that beat analysts' expectations by a wide margin. Revenue grew 15.4% (16.0% excluding the impact of currency) to $80.5 billion, and operating income increased 46.0% to $25.5 billion. Accelerating revenue growth across Search, YouTube Ads, and Google Cloud helped the company achieve its highest operating margin since 2021, signaling meaningful progress on the company's efforts to permanently reinvent its cost structure. On the generative AI front, management highlighted the company's infrastructure advantages, including its fifth-generation TPU (a chip developed by Google specifically for AI training and inference), high-performance data center architecture, and AI models that are 100 times more efficient than 18 months ago. Overall, we believe Alphabet is well-positioned for future AI opportunities and still has significant potential earnings power. Combined with a relatively undemanding valuation of 21 times forward net earnings and over $100 billion in cash on the balance sheet, it's easy to see why we remain optimistic about a range of outcomes over the next few years.”
Overall, Qualcomm Inc. (NASDAQ:QCOM) ranks #10 on Insider Monkey's list. Forget the Magnificent 7: Analysts discuss 'Big 10' AI stocks for 2024While we acknowledge Qualcomm Inc. (NASDAQ:QCOM) has potential, we believe AI stocks have the potential to deliver higher returns in a shorter time frame. If you're looking for AI stocks that have better prospects than Qualcomm Inc. (NASDAQ:QCOM) but trade at less than five times earnings, check out our report. Cheapest AI Stocks.
Read next: Analyst sees $25 billion in new 'opportunity' for NVIDIA and Jim Cramer's 10 stock recommendations for June.
Disclosures: None. This article originally appeared on Insider Monkey.
