For the better part of the past two years, artificial intelligence (AI) has dominated headlines on Wall Street — and with good reason. The capacity for AI-driven software and systems to learn and evolve over time without human intervention gives this technology utility in most industries around the globe.
Though estimates vary wildly, as you’d expect for a potentially game-changing technology, the addressable market for AI should yield numerous winners. In Sizing the Prize, the analysts at PwC forecast a 26% increase ($15.7 trillion) to global gross domestic product by 2030 solely from the AI revolution.
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Despite this leap forward in innovation, Wall Street’s smartest and most-successful investors have mixed feelings about AI stocks, as Form 13F filings demonstrate. A 13F is a required quarterly filing for institutional investors with at least $100 million in assets under management (AUM) that allows investors to see which stocks the brightest asset managers are buying and selling.
Though today, Nov. 14, marks the deadline for 13Fs to be filed for the September-ended quarter, Google parent Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) released its 13F a few days early. As of the end of September, Alphabet was overseeing a 42-stock, $1.84 billion portfolio.
Though Alphabet’s brightest investment minds weren’t all that active during the third quarter, two trades on the AI front absolutely stand out.
The most eye-popping move made by Alphabet during the third quarter was to send 421,050 shares of cloud-data warehousing stock Snowflake (NYSE: SNOW) packing, which represents a 79% reduction from where things stood at the end of June. Snowflake had been a top-10 holding by market value during the second quarter, but this is no longer the case for Alphabet.
The good news for Snowflake is that it still possesses a couple of well-defined competitive advantages that bode positively for the company over the long run. For instance, its cloud-based platform is built atop the most-popular cloud infrastructure services. This allows its clients to seamlessly share data across competing platforms, which might otherwise be challenging. It’s also incorporated AI and machine-learning capabilities into its platform to allow customers to create generative AI applications and build large language models.
More importantly, Snowflake has shunned the subscription-based software-as-a-service (SaaS) model in favor of a pay-as-you-go platform. Its clients pay based on how much data they store and how many Snowflake Compute Credits are used. This transparent pricing model has clearly resonated with users.
However, Snowflake’s valuation has always been something of an eyesore. When it was delivering 70% to 100%-plus annual sales growth, investors were more than willing to look past its triple-digit forward price-to-earnings (P/E) ratio and nosebleed multiple relative to sales. But with revenue growth slowing to an estimated 26% in fiscal 2025 (the company’s fiscal year ends on Jan. 31, 2025) and 23% in fiscal 2026, a forward P/E of 135 and a price-to-sales ratio of close to 10 are tough pills to swallow.
There may also be some degree of concern about the possibility of economic weakness on the horizon and what it might do to Snowflake’s bottom line. The first notable decline in U.S. M2 money supply since the Great Depression, coupled with the longest yield-curve inversion in history, point to the growing likelihood of a U.S. recession in the not-too-distant future. Historically, growth stocks with exorbitant valuation premiums tend to be the hardest hit during these short-lived downturns in the U.S. economy and stock market.
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On the other end of the spectrum, Alphabet’s investment team purchased shares in only two stocks during the third quarter. The one that should be raising eyebrows is AI-driven SaaS provider Freshworks (NASDAQ: FRSH).
In the September-ended quarter, Google’s parent picked up 3.87 million shares. But this marks just the tip of the iceberg, with Alphabet adding north of 12.7 million shares of Freshworks over the trailing-12-months (since Sept. 30, 2023), which increased its position in this high-growth company by 302%!
Freshworks finds itself well-positioned to take advantage of growing demand for customer relationship management (CRM) software solutions. CRM software is used by consumer-facing businesses to improve labor efficiency, increase sales, and boost profits. Freshworks’ bevy of solutions can help with everything from employee onboarding to personalized self-service channels, marketing, and business analytics.
With artificial intelligence being the hottest thing since sliced bread, it’s no surprise that Freshworks is incorporating this technology into its suite of CRM solutions. For instance, the introduction of Freddy AI Agent provides automated yet personal customer interactions that can free up human agents to tackle more complicated tasks.
Sales for Freshworks were undeniably aided by artificial intelligence and jumped 22% in the September-ended quarter, with the company upping the midpoint of its full-year sales expectations by $5.1 million to $715.1 million.
Equally important, Freshworks is landing bigger fish. It closed out the third quarter with 22,359 customers contributing at least $5,000 in annual recurring revenue, which is up 14% from the prior-year period. A net dollar retention rate of 107% also signifies that existing clients are spending an average of 7% more on a year-over-year basis. This is all good news that points to sustained double-digit sales growth.
If Freshworks can achieve 30%-plus average annual earnings growth through 2028, its current forward P/E of 32 might turn out to be a bargain.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Snowflake. The Motley Fool has a disclosure policy.
