Oops! Alphabet is selling its stakes in 2 historically high-flying artificial intelligence (AI) stocks

Five weeks ago, the most important data from the third quarter was published – and I don’t mean the inflation report for July.

No later than 45 calendar days after the end of the quarter (in the latest case, August 14), institutional investors with at least $100 million in assets under management are required to file a Form 13F with the Securities and Exchange Commission. Form 13F provides a clear snapshot of the stocks that Wall Street’s smartest and often wealthiest investors bought and sold during the most recent quarter. Even though these snapshots are up to 45 days old when filed, they offer invaluable insight into the stocks, industries, sectors and trends that fund managers are paying attention to.

However, 13F filings are a necessity for more than just investment institutions. Some of Wall Street’s largest and most successful firms have significant stakes in other companies, including Nvidiaand are required to file Form 13F quarterly.

One such company that has invested almost $2 billion in 42 stocks is Alphabet(NASDAQ: GOOGL)(NASDAQ:GOOG)the company that owns the Google search engine, the YouTube streaming platform and the Waymo autonomous ride-hailing service, among other businesses.

Alphabet is a search engine powerhouse… and so much more!

Most investors know Alphabet because of its world-leading search engine, Google.

In August, Google accounted for a whopping 90.48% of global search share, according to GlobalStats. In fact, Google has had at least 90% of monthly global internet search share for more than nine years. That makes it a clear target for companies looking to target users with their messages, and it gives parent Alphabet incredible advertising pricing power.

You’re probably also familiar with YouTube, the world’s second-most-visited social media site, with about 2.5 billion monthly active users. The introduction of Shorts—short videos 60 seconds or less long—in the second half of 2020 gave the company an additional opportunity to leverage ad revenue.

I would be remiss if I didn’t mention that Alphabet’s Google Cloud is the world’s No. 3 cloud infrastructure services platform by spend, with 10% of the market, according to Canalys, in the quarter ended in June. After years of losses, Google Cloud transitioned to recurring gains in 2023 and hasn’t looked back. With cloud services margins often outpacing advertising margins, this segment should be a key cash flow driver for Alphabet for the rest of the decade.

But Alphabet is also an investor. Almost a quarter of its portfolio is invested in software development, security and developer businesses GitLaband more than 16% of invested assets are frozen in Arm HoldingsArm generates revenue through licensing and royalties from chipmakers that use its designs to produce central processing units, graphics processing units, and other hardware.

But it’s not what Alphabet has that’s raising eyebrows. Rather, it’s the two core artificial intelligence (AI) stocks it’s been selling in consecutive quarters.

CrowdStrike Holdings

First AI Action Alphabet’s investment managers showed the door in subsequent quarters as a provider of cybersecurity solutionsCrowdStrike Holdings(NASDAQ: CRWD)After reducing its stake in CrowdStrike by a third in the quarter ended in March, Alphabet reduced its remaining position by another 50% (427,894 shares) in the quarter ended in June. CrowdStrike is now Alphabet’s fourth-largest position, down from No. 2, where it started in 2024.

Valuation is likely the culprit behind the sell-off. Despite CrowdStrike crushing Wall Street growth forecasts for years, the stock has been trading at a bloody price-to-sales (P/S) and price-to-earnings (P/E) multiple. Locking in profits was likely seen as a prudent move.

A more recent concern about CrowdStrike — though one that emerged in July and wasn’t detailed in the latest round of Form 13F filings — was a failed Falcon security platform update that caused significant downtime for select industries and customers. It’s not uncommon for such mishaps to cost cybersecurity firms revenue in the short term.

On the bright side, CrowdStrike’s bug was self-inflicted and had nothing to do with the cyberattack. Before the July outage, companies had shown a willingness to pay a premium for CrowdStrike’s services, given its history of protecting against breaches.

What’s more, CrowdStrike has mastered the art of selling add-ons in cybersecurity. In less than seven years, it went from a single-digit percentage of its customers purchasing four or more cloud module subscriptions to 65% of its customers using five or more cloud modules as of the quarter ended in July.

The cherry on top for CrowdStrike is that cybersecurity solutions have evolved into an essential service. No matter how well or poorly the U.S. economy is doing, companies with an online or cloud presence need to protect their data.

As Falcon’s cloud-based platform becomes increasingly more powerful over time thanks to artificial intelligence, Alphabet’s brightest investment minds may regret their decision to sell a combined two-thirds of their stake in CrowdStrike.

DexCom

Another AI-related stock that Alphabet’s investment team has been selling off for two quarters now is the medical device giantDexCom(NASDAQ:DXCM)After losing just over 51% of its stake in the maker of continuous glucose monitoring (CGM) systems in the first quarter, Alphabet sold another 42.1% of its position (753,836 shares) in the second quarter. This former No. 1 holding by Alphabet dropped to No. 6 and now accounts for about 6% of invested assets.

As with CrowdStrike, valuation has long been a glaring red flag for DexCom. While sales have grown at a relatively steady rate of around 20% over the years, DexCom’s P/S and P/E multiples have always raised eyebrows.

A more pressing issue for DexCom recently is what might happen to its business as a result of the introduction of glucagon-like peptide-1 (GLP-1) agonists. GLP-1 therapies have been shown to reduce body weight in patients taking them, and obesity is a common comorbidity in people with diabetes. Although studies have shown that patients taking GLP-1 drugs are more likely to use CGM, DexCom’s second-quarter operating results, which were released in July (i.e., after the 13F filing), did little to allay those concerns.

DexCom lost 40% of its value in the blink of an eye after lowering the midpoint of its full-year sales guidance by about $250 million and highlighting a long list of challenges during the quarter. CEO Kevin Sayer cited lower revenue per user and a restructuring of the company’s sales team as the primary reasons for the shortfall. In particular, Sayer believes the sales team’s lack of reach in select geographies led to a shortfall in new patient enrollment for the company.

The only positive in this situation is that DexCom is one of the two leading suppliers of CGM devices and should theoretically benefit from the growing number of people being diagnosed with diabetes in the U.S. and around the world.

DexCom can also rely on its various AI solutions to differentiate itself and provide value to its users. This includes everything from glycemic control for infusion pumps to helping users assess their diet to optimize blood glucose levels.

But the nature of DexCom’s earnings miss is troubling, to say the least. I wouldn’t be surprised if Alphabet continued to remove DexCom from its investment portfolio in the quarter ended in September.

Where to invest $1000 right now

When our team of analysts has a stock tip, it pays to listen. After all, Stock Advisors Total average return was 755% – a market-beating performance compared to 165% for the S&P 500 Index.*

They just revealed what they think is Top 10 Stocks for investors to buy now… and CrowdStrike made the list — but there are 9 other stocks you might have missed.

See 10 actions »

*Stock Advisor Returns as of September 16, 2024

Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Sean Williams holds positions in Alphabet. The Motley Fool holds positions in and recommends Alphabet, CrowdStrike, GitLab, and Nvidia. The Motley Fool recommends DexCom. The Motley Fool has a disclosure policy.