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Quick guide
In the first quarter, a number of hedge fund billionaires aggressively bought shares in Alphabet and ServiceNow, while being cautious about their holdings in Nvidia. While Nvidia remains a hot stock, several billionaires such as Louis· Bakken and Israel· England have sold some of their Nvidia shares and increased their investments in Alphabet and ServiceNow. Alphabet benefited from its strong digital advertising and cloud services business, with second-quarter revenue up 14% to $84.7 billion, although YouTube ad revenue fell short of expectations. ServiceNow also performed well, with second-quarter revenue up 22% to $2.5 billion and a 98% renewal rate. Looking ahead, analysts expect Alphabet and ServiceNow earnings to continue to grow, with average annual growth of 16% and 21%, respectively, through 2026. Despite the current high P/E ratio, patient investors can still keep an eye out for potential investment opportunities.
Hedge fund activity in technology stocks
In the first quarter, several hedge fund billionaires actively bought shares of Alphabet and ServiceNow. Nvidia has been one of the hottest stocks on Wall Street for nearly two years. However, professional money managers have become increasingly cautious about holding large stakes in the chipmaker, as its share price has soared. According to Morgan Stanley, in Q1, Nvidia was the second most underweight big tech stock in institutional portfolios, compared to its weight in the S&P 500 (^GSPC 1.58%).
The hedge fund billionaires listed below fueled the trend by selling Nvidia shares and buying shares in Alphabet (GOOGL 0.73%) (GOOG 0.75%) or ServiceNow (NOW 1.95%) throughout the quarter. Louis · Bakken of Moore Capital Management sold 2,006 shares of Nvidia, reducing his stake by 19 percent, while increasing his holdings in Alphabet, which is now among his top 20 non-option holdings. Millennial Management's Israel· England sold 720,004 shares of Nvidia, reducing its stake by 35%, and increased its stake in ServiceNow by an impressive 728%, placing it among the top 30 non-option holdings.
D.E. Shaw's David · Shaw sold 1.4 million shares of Nvidia stock, cutting his holdings by 38 percent, while increasing ServiceNow's holdings by 17 percent, making it one of his top 60 non-option holdings. Tuto's Paul · Tudo · Jones sold 103,337 shares of Nvidia, reducing their holdings by 78%, while significantly increasing their investment in Alphabet by 347%, placing them among the top 30 non-option holdings. It's worth noting that all of the aforementioned billionaires still maintain their investments in Nvidia, so their deals shouldn't be interpreted as a sign that Nvidia is a bad investment. However, Alphabet and ServiceNow have achieved staggering returns of 174% and 179% respectively over the past five years, suggesting that both stocks deserve further attention.
Alphabet's growth potential
Alphabet is driven by two important growth engines. Not only is it the world's largest digital advertising company, but it is also the third-largest cloud infrastructure provider with the highest sales volume. Its subsidiary, Google, is widely regarded as a leader in artificial intelligence (AI) research, and the company is leveraging this expertise in two business segments. New generative AI tools help advertisers create campaigns and optimize profits, while its Gemini family of models streamlines software development, data analysis, and threat detection. Gemini models can also be customized to develop tailored generative AI applications.
In the second quarter, Alphabet reported solid financial results that exceeded expectations, with revenue up 14% to $84.7 billion, driven by continued sales growth in the advertising division and accelerated development of cloud services. At the same time, GAAP net income increased 31% year-over-year to $1.89 per diluted share, as the company continued to emphasize strict cost control. CEO Sundar · Pichai said: "To date, our AI infrastructure and generative AI solutions for cloud customers have generated billions of dollars in revenue and are used by more than 2 million developers. "Overall, there was little to fault with the second-quarter results; However, the share price fell after the report, possibly due to YouTube ad revenue failing to meet expectations, or management warning that AI infrastructure investments could pose a short-term challenge to margins.
Despite the pullback, this decline provides a reasonable buying opportunity for patient investors. According to eMarketer, digital ad spending is expected to grow at an annual rate of 8% through 2027, while Grand View Research forecasts cloud services spending to grow at an annual rate of 21% through 2030. These tailwinds provide a strong impetus for Alphabet to achieve double-digit revenue growth at the end of the decade, with earnings expected to grow slightly faster than revenue, and margins to continue to expand. Wall Street analysts expect earnings to grow by 16% annually through 2026. This forecast leaves potential upside, and despite the current valuation of 24.3x P/E, it is still reasonable if Wall Street's consensus estimate holds. Shares have fallen 6% since the Q2 report, making it an attractive option for patient investors looking to build small holdings.
ServiceNow's strong market position
ServiceNow offers comprehensive workflow management software. The company is primarily recognized for its leadership in the AI market for IT service management (ITSM) and IT operations, but its platform also covers solutions for customer service management, HR service delivery, and robotic process automation. ServiceNow has been incorporating AI capabilities into its platform for years, introducing features such as conversational chatbots, intelligent document processing, and predictive analytics. Recently, the company launched a new suite of generative AI capabilities called Now Assist.
In the second quarter, ServiceNow reported strong financial results that exceeded revenue and earnings expectations. Revenue increased 22% to $2.5 billion, while non-GAAP net income surged 32% to $3.13 per diluted share. The company maintained an impressive renewal rate of 98% and outstanding performance obligations increased by 32%, indicating a strong revenue growth outlook for the coming quarters. Management highlighted that its performance was driven by broad demand for its software portfolio, with 14 of the 20 largest deals involving at least eight products, while Now Assist became the fastest-growing new product in the company's history.
Looking ahead, the ITSM market is expected to grow at an annual rate of 9% through 2030. ServiceNow is poised to surpass this growth due to its leadership in the IT software market, opportunities in the proximity to the software market, and an expanding suite of generative AI tools. As a result, Wall Street expects adjusted annual earnings to grow at a rate of 21% through 2026. However, this forecast makes the current adjusted P/E ratio of 63.5x more expensive. While ServiceNow is a standout company, I plan to put its stock on a watch list for the time being. Personally, if the P/E ratio is close to 40, I would prefer to buy shares in the company.