Cathie Wood has earned a reputation on Wall Street for making high-conviction bets on emerging businesses seeking to disrupt legacy incumbents across industries such as technology, financial services, and pharmaceuticals.
With that said, every now and again, Wood complements some of the more speculative positions in Ark’s portfolio with well-established blue chip opportunities.
When it comes to artificial intelligence (AI) stocks, it should come as no surprise that Ark’s portfolio includes several high-flying growth stocks such as Palantir Technologies, CrowdStrike, and CoreWeave. Also in the mix, however, are several members of the “Magnificent Seven.”
In late July, Ark added to an existing position in Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG) — scooping up 181,640 shares in the ARK Next Generation Internet ETF.
Let’s explore how Alphabet is investing in AI to transform its business. From there, I’ll break down some financial and valuation trends to help illustrate why Alphabet stock looks like a no-brainer right now.
Alphabet recently reported operating results for its second quarter, which ended June 30.
The company’s largest source of revenue — advertising — generated $71.3 billion in revenue, growing by 10% year over year. Advertising growth from Google Search and YouTube was even more robust, coming in at 12% and 13%, respectively.
Over the last few years, skeptics on Wall Street have been parroting a bearish narrative that the rise of ChatGPT and other competing large language models (LLMs) will diminish Google’s dominance in search. Accelerating growth between Google Search and YouTube suggests that advertisers still see a high return on investment (ROI) from these platforms, despite some shifts in how people are consuming content on the internet.
Where investors may be getting nitpicky is around Alphabet’s profit margin profile. The advertising segment sits under a larger category of Alphabet’s business, called Google Services. During the second quarter, Google Services grew its revenue 12% year over year to $82.5 billion. However, the operating margin for the Services business remained flat year over year — coming in at 40%.
When expenses grow in line with revenue, profit margins become capped. On the surface, this may look like Alphabet is not running an efficient business despite an accelerating top line. I wouldn’t rush to such a conclusion, though.
On top of that, Alphabet’s multibillion-dollar investments in AI data centers are often underappreciated — and yet it’s this infrastructure that attracted OpenAI, a perceived rival, as one of Google Cloud’s new major partners.
Lastly, Alphabet is also quietly building its own quantum computing operation through the development of its own custom chipsets, called Willow. Although monetizing quantum computing applications is still likely many years away, I find it encouraging that Alphabet is allocating capital across several pockets of the AI realm in an effort to build a diversified ecosystem that strengthens core businesses while opening the door to new opportunities as well.
Image source: Getty Images.
The chart below benchmarks Alphabet against many of its big tech peers on a price-to-earnings (P/E) basis. Ultimately, I think Alphabet stock is being punished by investors because the company isn’t posting growth as robust as some of its peers.
In my eyes, the fact that the company continues to grow revenue from its core businesses while striking lucrative deals with rivals and maintaining its profit margin profile in the face of aggressive investments shows a high degree of resiliency from Alphabet. Given the disparity in valuation multiples illustrated above, I think that the bearish narrative appears to be fully baked into Alphabet stock at this point.
To me, Alphabet is positioned for significant valuation expansion in the coming years as its infrastructure investments continue to bear fruit. I think Wood identified a rare opportunity among major AI players by identifying such a cheap stock floating around in a sea of frothy valuations. I see Alphabet stock as a no-brainer buying opportunity at its current price point for long-term investors.
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Adam Spatacco has positions in Alphabet, Amazon, Apple, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, CrowdStrike, Microsoft, Nvidia, Oracle, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
