Over the past year, some big US growth shares have soared. One in particular, that I have owned in the past, is up 109% during that period.
I sold it because I thought it had become overvalued. Since then though, it has risen further — and the emerging AI narrative arguably boosts the investment case.
So should I buy it again?
Tech giant with multiple focuses
The share in question is Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), the owner of Google. YouTube, Waymo and other tech businesses.
One criticism sometimes levelled at other well-known growth shares such as Apple and Meta Platforms is that they basically have a fairly narrowly defined core business and can therefore find it hard to adapt.
Whether that is a fair critique is a matter for debate. Apple has a thin product range but is wildly profitable. Meta owns multiple properties beyond Facebook, such as Instagram.
Household name with proven adaptation ability
But something I like about Alphabet is that its subsidiaries feel closer to fully-formed distinct businesses to me than Meta’s do. Instagram and Facebook are basically different nodes to the same platform, as I see it.
By contrast, Google search and Waymo’s self-driving cars may benefit from interconnection, but seem like more mutually robust businesses to me than, say, Instagram would be if it was broken off from the wider Meta advertising platform.
Why does that matter? It is about longevity. To survive let alone thrive for the next 50 years, I think Meta will need to reinvent itself dramatically. That explains why it experimented with the metaverse and is now doing the same with its AI push.
Alphabet will also need some reinvention, but it has proactively been doing that for a long time already. it strikes me as well-adapted for an uncertain future.
AI: boom or bust?
An example of that is AI. AI was initially perceived as a risk to Alphabet by many investors, as it threatens to decimate demand for Google’s core search business.
But by investing massively in AI, Alphabet has grasped the nettle of a possible threat and sought to turn it into an opportunity.
That may work. Alphabet has a large installed user base and lots of technical know-how. But the AI build-out is hugely expensive. That is the rub.
Indeed, Alphabet announced this month that it will seek to raise $80bn by selling new shares, diluting existing shareholders. For a company that has had enormous free cash flows as one of its main attractions, I see that as an alarming development.
Alphabet’s current price-to-earnings ratio of 24 is not outrageous, given the company’s strength. But heavy spending on AI could see earnings fall.
Although I continue to see this as a brilliant company, the growth share is not attractively valued right now, in my view. So I will not be investing.
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Christopher Ruane has no position in any of the shares mentioned.
