Google parent Alphabet is selling two fast-growing stocks to invest in promising artificial intelligence (AI) companies

Alphabet, which manages more than $2.5 billion in investment assets, sold stakes in two of its biggest holdings in the March quarter, nearly quadrupling its holdings in fast-growing artificial intelligence stocks.

Once a quarter, institutional investors with more than $100 million in assets under management are required to file Form 13F with the Securities and Exchange Commission, which details what Wall Street's best investors bought and sold in the most recent quarter, though 13F isn't limited to traditional fund managers.

Some of Wall Street's biggest and most influential companies put their capital into businesses they believe can change the world, or at least enrich themselves and their shareholders. Warren Buffett's roughly $379 billion portfolio at Berkshire Hathaway is a case in point.

Image source: Getty Images.

One company that hasn't shied away from putting capital to work on innovative investment ideas is Alphabet ( GOOGL -1.60% , GOOG -1.65% ), the parent company of cloud infrastructure services platform Google Cloud, streaming site YouTube and the globally dominant internet search engine Google, which has controlled at least 90% of monthly internet searches worldwide for more than nine years.

According to Alphabet's latest 13F filing, the company has invested over $2.5 billion in 43 companies across technology, healthcare, and finance. What's particularly interesting is that while Alphabet is reducing its holdings in two of the biggest, fastest-growing companies, it's fully invested in a rising superstar in the artificial intelligence (AI) space.

Alphabet cuts CrowdStrike Holdings stake by one-third

Perhaps the biggest surprise among Alphabet's investment chess moves in March was the company's decision to reduce its stake in cybersecurity specialist CrowdStrike Holdings Inc. (CRWD -0.89% ) by exactly one-third (selling 427,894 shares). CrowdStrike accounted for more than 15% of invested assets at the end of 2023, but now represents just under 11% of Alphabet's investments.

The logical reason for this divestiture activity is likely valuation. Even taking into account CrowdStrike's roughly 30% annual sales growth rate, the company is trading at nearly 17 times next year's expected revenue and more than 70 times next year's expected earnings. Given that the stock market is currently at historically high prices, a correction could hit companies with high valuation premiums like CrowdStrike the hardest.

But valuation aside, there's no reason to sell this top-tier cybersecurity solutions provider.

CrowdStrike attributes its impressive growth rate to its AI and machine learning-powered security platform, Falcon, which monitors trillions of events every week, continually improving its ability to identify and stop potential threats to end users.

Nearly all of CrowdStrike's key performance metrics are moving in the right direction, but add-on sales are the most telling. CrowdStrike offers 27 cloud modules on its Falcon platform, and 64% of clients purchase at least five of these cloud module subscriptions. As existing clients continue to increase spending, CrowdStrike's adjusted subscription gross margin reached 80% in the most recent quarter.

Finally, let's not forget that CrowdStrike and Alphabet's Google Cloud already have a strategic partnership, and while Alphabet is a seller of CrowdStrike shares, the two companies continue to work together.

Alphabet cuts its stake in Dexcom by more than half

Another big surprise found in Alphabet's 13F was the sale of just over 51% of its previous stake in medical device company Dexcom (DXCM -3.78%), with 1,891,112 shares sold. Dexcom was Alphabet's largest investment holding at the end of 2023, accounting for 21.2% of invested assets, but has now fallen to third place with 9.9% of invested assets.

As with CrowdStrike, valuation may have been what prompted Alphabet's investment team to hit the sell button: Despite sustained annual sales growth of nearly 20%, the continuous glucose monitoring (CGM) maker is valued at 10 times projected 2025 sales and roughly 58 times forward earnings per share (EPS).

Additionally, there are concerns that glucagon-like peptide-1 (GLP-1) agonists may negatively impact the need for CGM, but DexCom alleviates these concerns by pointing to research showing that GLP-1 users are more likely to use CGM.

The biggest factor in DexCom's favor is time. Between 2000 and 2021, the number of people with diabetes increased more than threefold worldwide to 537 million. The IDF Diabetes Atlas predicts that by 2045, 783 million people worldwide will have diabetes. The addressable market for CGM continues to expand, giving DexCom seemingly unlimited room for double-digit growth.

Innovation has also played a key role in DexCom's success: the company has developed multiple generations of CGMs, regularly improving the devices to wirelessly measure and seamlessly share vital data with your doctor.

Additionally, Alphabet's life sciences division (known as Verily) and DexCom have been partners for nine years, and the collaboration doesn't look like it's ending anytime soon.

Image source: Getty Images.

Google's parent company puts GitLab in top position

With DexCom knocked out of Alphabet's top holding and CrowdStrike remaining in second place, development, security and operations (DevSecOps) software developer GitLab (GTLB -0.78%) has risen to the top of Alphabet's more than $2.5 billion investment portfolio. Alphabet bought more than 7.11 million shares of GitLab in the March quarter, increasing its existing stake in the company by about 269%.

GitLab's DevSecOps platform empowers enterprises across the entire software development lifecycle, and a key aspect of the GitLab platform is that it automatically integrates security throughout this development and deployment process.

Particularly appealing to Alphabet is the role artificial intelligence can play in driving GitLab's revenue and profits, with the introduction of AI capabilities to GitLab Duo Pro, such as coding suggestions that are particularly useful for large language models, and Duo Chat, which can generate and process text to identify useful information.

From an operational standpoint, GitLab appears to be doing well. The company is adjusted profitable and has positive free cash flow. What's more, Wall Street is predicting at least 25% revenue growth this year and next, which isn't surprising given that the dollar-based net retention rate is 130%. The numbers suggest that existing clients are spending 30% more with GitLab year over year.

In keeping with a common theme on this list, Alphabet's Google Cloud has an ongoing partnership with GitLab, which offers AI-driven solutions that Google Cloud can leverage to deploy solutions to its customers faster and more securely.

Sources 1/ https://Google.com/ 2/ https://www.fool.com/investing/2024/05/23/alphabet-sell-2-hypergrowth-stocks-pile-into-ai/ The mention sources can contact us to remove/changing this article

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