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Hedge fund magnate Seth Klarman owns only a select "Magnificent Seven" stocks, recently increasing his stake in one of them.

A distinct group member emerges as an apparent favorite choice for Klarman, distinguishing themselves from all others in the group.

Seth Klarman, a billionaire, maintains only one exclusive group of seven stocks in his hedge fund's...
Seth Klarman, a billionaire, maintains only one exclusive group of seven stocks in his hedge fund's investment portfolio, and he recently increased his holdings in this selective group.

Hedge fund magnate Seth Klarman owns only a select "Magnificent Seven" stocks, recently increasing his stake in one of them.

In a move that underscores the potential of Alphabet (GOOGL), renowned investor Seth Klarman's Baupost Group has increased its stake in the tech giant by 46%. Klarman, known for his deep value investing approach, sees Alphabet as a "bargain" among the Magnificent Seven stocks, thanks to its strong fundamentals, competitive advantages, and potential for double-digit revenue growth.

The Magnificent Seven, a group of stocks that Klarman considers to have interesting opportunities, includes Alphabet, which trades for a valuation below the S&P 500's average. Despite the regulatory risks that Alphabet faces, Klarman believes that the company's brand and product strength could mitigate the impact on its operations.

One of the key drivers of Alphabet's potential is its Google Cloud platform, which has seen strong demand fueled by AI. In the first quarter, revenue from Google Cloud increased by 28% year over year. This growth is underpinned by Alphabet's investments in AI infrastructure and world-class AI research, which strengthens its competitive moat and future earnings potential.

Klarman's investment strategy involves buying stocks that are mispriced relative to their value, even if they don't fit traditional deep value criteria. In the case of Alphabet, he sees a significant valuation discount, creating an opportunity for investors seeking long-term compounding returns of around 15% or more per year.

Alphabet's business quality and durability are also compelling. Despite antitrust headwinds and possible regulatory actions, the company has a broad, diversified business portfolio, suggesting multiple future growth engines beyond its core ad business. Alphabet’s robust capital allocation, high returns on invested capital, and strong cash flow provide a buffer to absorb financial shocks from regulatory pressures and support ongoing investments.

However, Alphabet is not without risks. Regulatory scrutiny could lead to interventions such as the sale of its Chrome browser, ad marketplace, and ending agreements like its $20 billion per year traffic acquisition partnership with Apple. Moreover, AI chatbots like OpenAI's ChatGPT are seen as a potential threat to Google's dominance of web search, but Alphabet's data doesn't support the narrative of significant share loss.

Despite these challenges, Klarman remains confident in Alphabet's long-term growth prospects. His approach would involve rigorous due diligence to assess Alphabet’s fundamental quality and intrinsic value, patience to allow the market to recognize its true worth, and confidence that Alphabet’s diversified growth prospects and financial strength provide a sufficient margin of safety.

In addition to Google Cloud, Alphabet's "Other Bets" include the leading self-driving car company, Waymo, which has made significant progress in its robotaxi business and remains years ahead of the next closest competitor. Waymo completes 250,000 paid trips per week and could prove a significant growth driver for the company as the market expands.

While Tesla's high valuation may seem impressive, it comes despite its plans for a robotaxi service and humanoid robots. However, Tesla's core car business faces stiff competition abroad, making it a riskier investment compared to Alphabet.

In conclusion, Klarman sees Alphabet as a compelling deep value investment because it combines being temporarily mispriced with a durable competitive advantage and multiple high-growth avenues, making it a potentially undervalued "bargain" among leading tech stocks even amid regulatory and competitive challenges.

Alphabet's strong fundamentals and competitive advantages, such as its Google Cloud platform and "Other Bets" like Waymo, are making it an attractive investment opportunity for value investors like Seth Klarman. Klarman's investing strategy involves buying stocks that are mispriced relative to their value, and he sees a significant valuation discount in Alphabet, offering potential compounding returns of around 15% or more per year. Technology plays a crucial role in Alphabet's growth prospects, with investments in AI infrastructure and world-class AI research strengthening its competitive moat and future earnings potential.

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