Alphabet Inc - Class A

Alphabet's server useful lives increased from three years in 2020 to six years in 2024, which lowers the annual depreciation expense and boosts earnings. However, cash flows remain unaffected by accounting policy changes, highlighting a divergence between earnings per share growth and free cash flow per share growth across hyperscalers over the past four years.

Alphabet is a holding company that owns a collection of businesses, the largest and most important of which by far is Google. Google is the global leader in online search and advertising and also offers cloud solutions to businesses and consumers globally, with a goal of organizing the world’s information and making it universally accessible and useful. Alphabet reported quarterly financial results that were fundamentally strong and above consensus expectations for most key metrics. The company is seeing the positive benefits of its AI investments in all the core areas of its business, including accelerating search volumes, strong user engagement and streamlined content creation on YouTube as well as the broader advertising business, and faster growth in the company’s cloud business.

Alphabet delivered robust results during the first quarter. Core Google Search revenue accelerated to 19%, the fastest growth in 16 quarters. AI continues to be an expansionary moment for search as search queries are at an all-time high. Google Cloud revenue growth accelerated to 63%, the fastest growth rate it has ever reported. Google Cloud margins expanded to 33%, up from 18% in the first quarter of 2025. Google Cloud backlog grew 5X year-over-year with growth driven by enterprise AI offerings and TPU sales. While we have always had high expectations for Google’s Cloud business, its performance over the last several years has simply been astonishing. Google Cloud is now roughly 40% of our value for the company.

Alphabet was our strongest performer as the market moved from fearing AI would cannibalise the Google Search business, to recognising the breadth of the company's AI advantages. Search re-accelerated through the year, driven by strength in retail and financial services. AI Overviews and the rapid scaling of AI Mode expanded the share of monetisable queries, reinforcing our view that Search is in an expansionary phase rather than facing cannibalisation. As the only hyperscaler with a fully integrated AI stack spanning chips, infrastructure, models, data and distribution, we believe Alphabet is exceptionally well placed to benefit from the ongoing adoption of AI and it remains a core holding in the portfolio.

Alphabet (GOOG) outperformed during the second quarter of 2026 as investor confidence improved following another quarter of durable execution across its core businesses and continued evidence that its significant AI investments are translating into stronger financial performance. Search remained resilient despite increasing competition, while Google Cloud continued to benefit from robust enterprise AI demand, supporting accelerating revenue growth and expanding profitability. In our view, Alphabet continues to benefit from multiple durable growth drivers across Search, Cloud, YouTube, and AI, positioning the company to deliver attractive long-term earnings growth despite ongoing investment.

Alphabet faces significant challenges in the current AI boom, which has led to increased capital expenditure needs. Despite being one of the most cash-generative companies, Alphabet has had to raise additional capital, indicating potential strain. The manager draws a cautionary parallel with the decline of AMP, suggesting that Alphabet could similarly falter if it fails to adapt to the rapidly changing landscape. The fear is that Alphabet's management may be hesitant to make necessary changes, risking its relevance in a competitive market. The overall sentiment is that while Alphabet has a strong position, it is not immune to the pitfalls of mismanagement in a transformative era.

The rapid evolution and commercialization of artificial intelligence (AI) have created a significant opportunity for companies like Alphabet. The demand for memory has surged by 400% in just over a year due to the AI buildout, and Alphabet, along with other cash flow flush hyperscalers, is well-positioned to benefit from this trend. The societal implications of AI are expected to lead to massive productivity gains, and Alphabet's involvement in this sector positions it as a key player in the ongoing AI revolution. The manager believes that the current AI-led cycle is extreme enough to drive market returns significantly, making Alphabet a valuable investment.

We are optimistic about Alphabet Inc as we anticipate continued strength in corporate earnings driven largely by AI-related investment. The company is well-positioned to benefit from the growing demand for AI infrastructure, as evidenced by its plans to spend $200 billion in CAPEX this year. Despite raising equity capital, which raised eyebrows given its strong balance sheet, this move indicates a commitment to expanding its AI capabilities. Alphabet's ability to generate significant operating cash flow and its status as a strong credit risk suggest it will have access to necessary capital for AI buildout, reinforcing its competitive position in the market.

Alphabet is an exceedingly rare, if not entirely unique, business, growing a nearly $450 billion gross asset base by 40% while maintaining a 30% return on that massive asset base. Google Search and Cloud continue to accelerate, with Search posting 19% revenue growth and Cloud posting 63% revenue growth, helping drive 30% growth in operating income. We expect Alphabet to continue delivering excellent returns as it helps proliferate AI use cases for businesses, consumers, and data centers. The Company also has a 14% stake in the private company Anthropic, which could be worth more than $100 billion based on valuations reported from recent capital raises.

Alphabet, the owner of Google, is one of the best businesses the world has ever seen. It is effectively a monopoly on the global online advertising industry. Building that monopoly cost very little in the way of tangible capital, the barriers to entry are almost insurmountable and it has generated hundreds of billions of free cashflow in its 25-year history. The transformational importance of generative AI has been clear to us for a long time, and Alphabet is one of the three global leaders in the AI revolution. While the AI industry may face challenges, Alphabet's strong position and cash generation capabilities make it a compelling investment.