Google’s parent Alphabet sold 79% of its stake in an avalanche and is piling into this artificial intelligence (AI) stock instead | Motley Fool

For the better part of the past two years, artificial intelligence (AI) has dominated the headlines on Wall Street – and with good reason. The ability for AI-driven software and systems to learn and adapt over time without human intervention makes this technology a resource in most industries worldwide.

Although estimates vary wildly, as you’d expect for a potentially game-changing technology, the navigable market for AI should yield several winners. In Increase in Prizethe analysts at PwC predict a 26% increase ($15.7 trillion) to global gross domestic product by 2030 from the AI ​​revolution alone.

Despite this leap in innovation, Wall Street’s smartest and most successful investors have mixed feelings about AI stocks, as Form 13F filings reveal. 13F is a required quarterly filing for institutional investors with at least $100 million in assets under management (AUM) that allows investors to see which stocks the brightest fund managers are buying and selling .

However, 13Fs aren’t just limited to billionaire money managers and hedge funds. Some of Wall Street’s most influential businesses have investment arms and are required to file a 13F if they have more than $100 million in AUM.

Although today, November 14, marks the deadline to file 13F for the quarter ending in September, parent Google Alphabet (GOOGL -1.51%) (GOG -1.54%) he released his 13F a few days early. At the end of September, Alphabet was overseeing a 42-stock, $1.84 billion portfolio.

Although the brightest investment minds in Alphabet were less active in the third quarter, two trades on the AI ​​front absolutely stand out.

Alphabet’s investment team bought shares of Snowflake

The most interesting move that Alphabet made in the third quarter was to send 421,050 shares of cloud data storage stock. Snowflake (SNOW 4.20%) packing, which represents a 79% decrease from where things were at the end of June. Avalanche had been in the top 10 by market value in the second quarter, but this is no longer the case for Alphabet.

The good news for Snowflake is that it still has a couple of well-defined competitive advantages that bode well for the company in the long run. For example, its cloud-based platform is built on top of the most popular cloud infrastructure services. This allows its clients to quickly share data across competing platforms, which could otherwise be challenging. It has also incorporated AI and machine learning capabilities into its platform to enable customers to create generative AI applications and build large language models.

More importantly, Snowflake has eschewed the subscription-based software-as-a-service (SaaS) model in favor of a pay-as-you-go platform. Their clients pay based on how much data they store and how many Snowflake Computing Credits are used. This transparent pricing model has clearly appealed to consumers.

However, Snowflake’s valuation has always been a sensation. When it was delivering 70% to 100%-plus annual sales growth, investors were more willing to look past its triple-digit price-to-earnings (P/E) ratio and its multiple compared to sales. But with revenue growth slowing to around 26% in fiscal 2025 (the company’s fiscal year ends on January 31, 2025) and 23% in fiscal 2026, a forward P/E of 135 and a price-to-sales ratio of close. to 10 they are hard to swallow.

There may also be a level of concern about the possibility of economic weakness on the horizon and what it could do to Snowflake’s bottom line. The first major decline in the US M2 money supply since the Great Depression, combined with the longest yield curve inversion in history, indicates that US recessions are likely to intensify in the not-too-distant future go away. Historically, growth stocks with volatile valuations tend to be the hardest hit in these short-term downturns in the US economy and stock market.

Alphabet has joined this high-octane AI software provider

On the other end of the spectrum, Alphabet’s investment team bought shares in just two stocks in the third quarter. The AI-driven SaaS provider is the one that should be raising eyebrows Freshworks (FRSH 0.79%).

In the fourth quarter at the end of September, the parent of Google raised 3.87 million shares. But this marks just the tip of the iceberg, with Alphabet selling north of 12.7 million shares of Freshworks over the trailing 12 months (from September 30, 2023), which increased its position in the company’s high- this grew 302%!

Freshworks finds itself well positioned to take advantage of growing demand for customer relationship management (CRM) software solutions. CRM software is used by customer-facing businesses to improve labor efficiency, increase sales, and increase profits. Freshworks solutions can help with everything from employee onboarding to personalized self-service channels, marketing, and business analytics.

With artificial intelligence being the hottest thing since sliced ​​bread, it’s no surprise that Freshworks is incorporating this technology into their suite of CRM solutions. For example, the introduction of Freddy AI Agent provides automated yet personalized customer interactions that can free up human agents to handle more complex tasks.

Sales for Freshworks were undoubtedly aided by artificial intelligence and jumped 22% in the quarter ending in September, with the company coming in at the midpoint of its full-year sales expectations of $5.1 million to $715.1 million.

Equally important, Freshworks is landing bigger fish. It closed the third quarter with 22,359 customers adding at least $5,000 in annual recurring revenue, which is up 14% from the previous year. A net dollar retention rate of 107% also indicates that existing customers are spending an average of 7% more on a year-over-year basis. All this is good news that points to steady double-digit sales growth.

If Freshworks can achieve 30%-plus average annual earnings growth through 2028, the current forward P/E of 32 may be a bargain.