Google's parent company Alphabet (GOOG, Financial)(GOOGL) is one of the most-owned stocks at hedge funds. According to second-quarter 13F data, the largest owner of the shares, both in terms of the number of shares owned and the percentage of the portfolio allocated to the position, at the end of the second quarter was Chris Hohn's TCI Fund Management. According to the firm's 13F, the fund owned just under three million shares at the end of the second quarter, giving the position a 17.3% portfolio weight.
Profits continue to rise
Despite the company's size, Alphabet's C shares have been one of the best performing investments in the S&P 500 this year. The stock has returned 60%. Over the past 12 months, it has added 84%.
Unlike some other investments on the market, which are exhibiting speculative bubble-like qualities, shares in Google's parent company are being pushed higher by the firm's rising profits. The company reported its second-quarter numbers on Tuesday, and they blew past analysts' expectations.
Earnings per share came in at $27.26 compared to estimates of $19.34. YouTube advertising revenue increased to $7 billion, and Google Cloud revenues rose to $4.6 billion. Total Google ad revenue increased to $50.44 billion, up 69% from the year-ago quarter.
While YouTube's advertising revenue increased 83% year over year, many analysts believe this division is still not living up to its full potential. After all, this is the largest online video platform in the world. YouTube users watch one billion hours of video per day, while Netflix (NFLX, Financial) viewers consume 400 million hours. Despite this discrepancy, the two platforms' quarterly revenues are roughly similar.
Then there's the potential of the cloud business to consider. The global cloud computing market is worth around $42 billion. That suggests Google currently has around 10% of the market. There's plenty of room to expand here if Google can gain more of an edge against competitors.
Buy and hold
I highlighted TCI at the beginning of this article because this hedge fund has an established track record of buying and holding high-quality businesses, and it has used that approach with Alphabet.
The hedge fund started buying a position in this tech business in the third quarter of 2017. Before that, the fund had more than a third of its portfolio invested in Yahoo, which became a $6 billion stake in Altaba after Yahoo sold its search business in 2017.
Alphabet first appeared on TCI's 13F as a 487,000-share position. The fund gradually increased its holding over the next few quarters, topping out at around 3.5 million shares in the third quarter of 2019.
TCI has since modestly reduced its position to around 3 million shares, but it continues to hold. As it started buying at around $1,000 per share, the hedge fund is presently sitting on a return of approximately 175% on its initial investment.
So far, the hedge fund has only been holding the stock for five years, which is not what I would call a long-term investment. However, in an environment when the average holding period of a stock is around five months, that's a long time.
What is also notable about how the hedge fund has owned the position is the fact that at one point, it made up 22.4% of reported assets on its 13F. That is a substantial allocation and shows the level of conviction the firm had for the company.
We can learn a lot from this relatively straightforward case study. TCI saw a company that it believed in and thought was undervalued. Hohn and his team took advantage of this to initiate a substantial position. They acted quickly and with conviction when the opportunity presented itself. Since then, all they have had to do is sit on their hands.
