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Our Newest Portfolio Position: Alphabet ($GOOGL)
Alphabet, parent of Google, YouTube, Gmail, Android, Waymo, and much more, should not sound like an obscure small-cap that some value guy found by turning over rocks looking for unloved and unfollowed investments. It’s an obvious member of the so-called Magnificent 7 that has been driving the market indices higher and higher with those lofty, high-tech valuations, right? The kind of stock that might be causing another bubble, right?
We purchased our initial shares in GOOG at the end of June for an average price of $171.60 and the remaining shares in the GOOGL class of shares for $178.60. As of October 31, 2025, after they reported Q3 earnings, both share classes traded north of $281, for gains of 64% and 58%, respectively. We don’t like to point out short-term price performance for reasons stated above, and quite simply, things can change fast. However, we’re trying to make a point here about value investing in general, and the depressed price of GOOGL at that time is a great example.
How is it that one of the largest and most followed companies in the world—widely regarded as one of the best businesses on earth—could be lying there undervalued like a translucent bag of $100 bills on a NYC sidewalk? The efficient market theorist/economist would tell you it’s an illusion because someone would have already picked up the bag of money.
The truth is, much of value investing lately has come down to what we call narrative arbitrage. GOOGL traded at a low valuation relative to its strength and growth due to a narrative around two issues:
The penalties that the judge in the DOJ’s case over Alphabet’s monopoly of its search and network ads business would be severe and possibly require the separation of Google Chrome, its internet browser.
The emergence of AI chatbots like ChatGPT was hurting Google’s cash cow: its traditional, blue-links search business.
For the DOJ’s case, we had it with good authority that the severe penalty scenario was much less likely than the prevailing narrative had laid out. On the other hand, if they did have to separate the Chrome browser, the valuation there would likely be so significant as to highlight just how valuable the sum of all of Alphabet’s parts actually are. Ironically, the judge in Washington, Amit Mehta, ruled against forcing Google to divest its Chrome web browser or its Android mobile operating system in response to his earlier finding that Google had a monopoly in search. Mehta noted that the rise of AI had “changed the course of this case,” emerging as a competitive threat to search. He imposed relatively light requirements on Google, such as orders to share search data with rivals.
As to whether the search business is being threatened by AI chatbots, Google has countered by adding an “AI Mode” section to its search bar and rolled out successive versions of their own AI chatbot called Gemini. Q3 earnings removed any doubt that ChatGPT, Perplexity, and others were diminishing the Google search business. In fact, Google has maintained that AI is expanding search and creating more queries and opportunities to deliver AI-relevant ads.
From the Wall Street Journal on Q3: “Google’s parent company reported a 16% surge in third-quarter revenue, with growth in its digital-advertising and cloud-computing units helping to finance robust artificial-intelligence spending. Sales reached a record $102.3 billion for Google-parent Alphabet, ahead of analyst expectations, and net income was about $35 billion, a 33% increase over the same period a year ago. Shares rose more than 6% in after-hours trading.
Like other large tech companies, Google is pouring tens of billions of dollars into AI development. It lifted its estimates for capital expenditures this year to a range of $91 billion to $93 billion, up from $52.5 billion in 2024. The company said it expects a substantial increase in capital expenditures next year.”
Alphabet is a very deep and broad computer science company that practically invented AI through its DeepMind division. It has numerous lines of business that would be worth hundreds of billions of dollars individually if they ever spun out of the parent. For instance, Google Cloud has developed its own AI chips called TPUs, which rival, and some would say best, Nvidia’s AI chips. Google continues to benefit from its full-stack approach to AI, including industry-leading models. Cloud growth accelerated to 34% in 3Q, supported by billions of dollars in revenue from enterprise AI products. Google is signing new customers faster (new GCP customers +34% Y/Y), signing larger deals with more $1B+ deals YTD than the previous two years combined, and is deepening relationships with existing customers.
We’re thrilled to own Alphabet and think it is in one of the best positions in the country to capitalize on AI. This is due in part to its deep infrastructure and unmatched access to data used to train AI through YouTube and its decades of scraping the internet for its search business.
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