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The following segment was excerpted from this fund letter.
Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), the parent company of Google, delivered stellar business results in the first half of 2024. Revenues grew 14% powered by Google’s dominant position in the fast-growing digital advertising market as well as certain company-specific tailwinds including the increasing adoption of AI automation tools by advertisers and YouTube’s continued success in the Connected TV Medium. Strong revenue growth coupled with cost control initiatives and stable staffing levels (headcount has remained flat year-to-date), resulted in strong operating leverage. Operating profit margins expanded approximately 340 basis points, excluding one-time severance and real estate charges. In the second quarter, the company’s Cloud segment outpaced its major competitors with 29% revenue growth and achieved 11% profit margins, after first reaching profitability just 18 months ago.
Amidst solid financial performance, Google is achieving notable milestones in its AI product development roadmap. At its annual developer conference in early May, the company unveiled the broad rollout of “AI Overviews”, which are AI-powered summary responses for certain types of queries. Early results from AI Overviews highlight how thoughtful integration of AI into Search not only improves the user experience, leading to more frequent and detailed queries, but also creates opportunities for greater ad monetization through context-rich responses and higher conversion rates.
Due to the encouraging initial success of its AI offerings, Google is meaningfully ramping up its AI investments and is on track to spend nearly $50 billion in capital expenditures in 2024, a more than 50% increase compared to the prior year. We believe this increased level of investment will further differentiate the company’s technical infrastructure and cost-to-serve advantage relative to competitors. As a proof point, compute costs for Google’s generative AI search responses are down 80% from just a year ago. Such step-function improvements uniquely position the company to scale its AI capabilities to a user base of more than two billion consumers.
Despite the material increase in infrastructure investments, the company remains committed to returning capital to shareholders and recently initiated a quarterly dividend of $0.20 per share, a ~0.5% dividend yield. The dividend supplements the company’s ongoing share repurchase program of approximately $16 billion in quarterly buybacks, which represents capital return equivalent to ~3% of the company’s market capitalization on an annualized basis.
The company also recently announced the appointment of Anat Ashkenazi as its new Chief Financial Officer. Anat had previously served as the CFO of Eli Lilly (LLY) where she spent 23 years in various senior finance and operational leadership roles. We believe Anat’s extensive experience at Eli Lilly managing a complex, multiline business through multiple investment cycles will prove highly valuable as Google invests behind long-term AI initiatives while maintaining its strong commitment to cost control.
Outgoing CFO, Ruth Porat, will take on a newly created role as President and Chief Investment Officer of Alphabet, including oversight of its portfolio of “Other Bets”. We look forward to Ruth’s impact on scaling and commercializing the company’s Other Bets ventures, including its promising autonomous driving subsidiary, Waymo.
We have been closely following the recent federal court ruling against Google in the Department of Justice’s antitrust case on the company’s default search agreements with Apple and Android OEMs. Google is appealing the decision and anticipates a resolution of the appeals process or a ruling on potential remedies to take at least several months, and potentially more than a year. We will continue to closely track developments in the case but believe that even in a scenario where Google loses its appeal, the company is well-positioned to navigate a range of likely potential remedy outcomes.
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DISCLAIMERS Limitations of Performance Data Past performance is not necessarily indicative of future results. All investments involve risk including the loss of principal. This report does not constitute a recommendation, an offer to sell or a solicitation of an offer to purchase any security or investment product. This report contains information and analyses relating to all publicly disclosed positions above 50 basis points in the Company’s portfolio from January 1, 2024 to June 30, 2024. Pershing Square may currently or in the future buy, sell, cover or otherwise change the form of its investment in the companies discussed in this report for any reason. Pershing Square hereby disclaims any duty to provide any updates or changes to the information contained here including, without limitation, the manner or type of any Pershing Square investment. Forward-Looking Statements This report also contains forward-looking statements, which reflect Pershing Square’s views. These forward-looking statements can be identified by reference to words such as “believe”, “expect”, potential”, “continue”, “may”, “will”, “should”, “seek”, “approximately”, “predict”, “intend”, “plan”, “estimate”, “anticipate” or other comparable words. These forward-looking statements are subject to various risks, uncertainties and assumptions. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. Should any assumptions underlying the forward-looking statements contained herein prove to be incorrect, the actual outcome or results may differ materially from outcomes or results projected in these statements. None of the Company, Pershing Square or any of their respective affiliates undertakes any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law or regulation. |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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