Cathie Wood has recently purchased one of the most affordable stocks from the “Magnificent Seven.”
Cathie Wood’s Investment Approach
Cathie Wood has become well-known on Wall Street for her strong, high-stakes investments in emerging companies that aim to disrupt established firms in sectors like technology, finance, and pharmaceuticals.
However, Wood occasionally balances her more speculative picks in Ark’s portfolio with established blue chip options.
Ark’s Exposure to AI Stocks
Within Ark’s holdings focused on artificial intelligence (AI), it’s not surprising that they include several high-growth stocks such as Palantir Technologies, CrowdStrike, and CoreWeave. Notably, a few stocks from the “Magnificent Seven” are part of this mix, including an increased position in Alphabet (GOOGL 2.48%) (GOOG 2.44%), where they acquired 181,640 shares in the ARK Next Generation Internet ETF.
Alphabet’s Strong Business Performance
Alphabet’s recent operating results for the second quarter, which concluded on June 30, exhibit robust health. The advertising segment, its primary revenue source, generated $71.3 billion, reflecting a year-over-year growth of 10%. Notably, Google Search and YouTube saw even stronger growth rates of 12% and 13%, respectively.
Despite a bearish outlook from skeptics regarding the impact of ChatGPT and comparable large language models (LLMs) on Google’s search dominance, the growth in Google Search and YouTube indicates that advertisers still find high returns from these platforms, despite evolving content consumption trends.
Investors’ Concerns About Profit Margins
Concerns among investors may stem from Alphabet’s profit margin profile. The advertising segment falls under the larger Google Services umbrella, which reported a 12% revenue growth year over year, totaling $82.5 billion. However, the operating margin for Google Services remained steady at 40%, year over year.
This stagnation in profit margins might suggest inefficiency within Alphabet, despite increasing revenues. However, such a conclusion might be premature.
Strategic Moves in AI and Quantum Computing
Alphabet has made strategic investments in AI over the past few years. For example, the company enhanced its cloud services by acquiring Wiz, a cybersecurity startup, for approximately $32 billion.
Additionally, its sizable investments in AI data centers are often undervalued. This infrastructure has also attracted partnerships, such as OpenAI, to Google Cloud.
Buying Potential for Alphabet Stock
The accompanying chart compares Alphabet’s valuation against several tech giants based on a price-to-earnings (P/E) ratio. Presently, Alphabet appears undervalued as it faces pressure from investors due to slower growth compared to peers.
Despite this, the continued revenue growth, successful partnerships, and stable profit margin indicate Alphabet’s resilience. Given the significant disparity in valuations, the negative sentiment surrounding Alphabet may already be priced in.
As Alphabet continues to reap benefits from its infrastructure investments, it seems poised for substantial valuation growth in the coming years. Cathie Wood’s recent buy indicates the recognition of a unique opportunity in a market filled with inflated valuations, making Alphabet a compelling buy for long-term investors.
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.
