In a surprising strategic shift during the third quarter, shares of cloud-data warehousing company Snowflake were dramatically reduced by Alphabet, as the tech giant reallocates focus towards a rising player in the customer relationship management (CRM) sector.
For nearly two years now, artificial intelligence (AI) has increasingly captured the attention of Wall Street, and it’s no surprise why. The ability of AI-driven software and systems to independently learn and adapt over time creates immense possibilities across a multitude of industries worldwide.
While predictions about the future of AI vary significantly, there is clear consensus on its transformative potential, making it likely to produce various winners. Analysts at PwC, in their report Sizing the Prize, forecast a staggering 26% boost to global gross domestic product, amounting to $15.7 trillion, by 2030 as a direct result of advances in artificial intelligence.
However, despite this promising advancement in technology, even Wall Street’s most savvy investors are exhibiting mixed feelings towards AI stocks, as evidenced by the latest Form 13F filings. A 13F is a mandatory disclosure for institutional investors managing at least $100 million in assets, revealing the stocks being bought and sold by top asset managers.
Furthermore, 13Fs are not exclusive to the elite billionaires and hedge funds; many influential Wall Street firms with their own investment branches are required to file a 13F when holdings exceed the $100 million threshold.
Today, November 14, marks the crucial deadline for submitting the 13Fs for the quarter ending in September, and notably, Google’s parent company Alphabet (GOOGL -1.85%) (GOOG -1.74%) released its filing a few days ahead of schedule. At the close of September, Alphabet managed a diversified portfolio worth $1.84 billion consisting of 42 stocks.
Alphabet’s investment team, while not overly active during the latest quarter, made two significant moves in the AI sector that have captured attention.
Alphabet’s investment team dumped shares of Snowflake
Among Alphabet’s most striking decisions in the third quarter was the divestiture of 421,050 shares in the cloud-data warehousing stock Snowflake (SNOW -1.12%), marking an incredible 79% reduction compared to its holdings at the end of June. This substantial sell-off meant that Snowflake, previously a top-10 holding by market value, no longer holds that position within Alphabet’s portfolio.
On a positive note for Snowflake, the company still retains several competitive advantages that favor its long-term outlook. Its cloud-based platform is built upon widely utilized cloud infrastructure services, enabling clients to effortlessly share data across diverse platforms. Additionally, it has integrated AI and machine-learning capabilities into its offerings, empowering customers to develop generative AI applications and construct large language models.
More notably, Snowflake has opted for a pay-as-you-go pricing model instead of the traditional subscription-based software-as-a-service (SaaS) options. This allows clients to pay based on their data storage needs and the quantity of Snowflake Compute Credits utilized, a pricing strategy that has clearly resonated well with its user base.
Nevertheless, Snowflake’s valuation remains a contentious issue. Investors were more forgiving of its hefty triple-digit forward price-to-earnings (P/E) ratio when it was achieving staggering 70% to over 100% annual sales growth. However, with projections indicating revenue growth slowing to around 26% in fiscal 2025 and 23% in fiscal 2026, the current forward P/E of 135 and a price-to-sales ratio nearing 10 are becoming increasingly difficult for investors to accept.
Moreover, growing concerns about potential economic downturns could also weigh heavily on Snowflake’s financial performance. The unprecedented first decline in the U.S. M2 money supply since the Great Depression, alongside the longest yield-curve inversion on record, suggests an increased risk of recession in the near future. Historically, stocks with high valuation premiums, including growth stocks like Snowflake, are often hit hardest during brief economic downturns.
Alphabet has quadrupled its stake in this high-octane AI-software provider
Conversely, Alphabet’s investment team made a notable acquisition by purchasing shares in only two companies during the third quarter, with considerable emphasis on the AI-driven SaaS provider Freshworks (FRSH -1.86%).
During the September-ended quarter, Google’s parent company acquired an impressive 3.87 million shares, which represents just the beginning of a larger trend; Alphabet has accumulated over 12.7 million shares of Freshworks in the past year alone, amplifying its stake in this rapidly growing company by a remarkable 302%!
Freshworks stands to benefit from the escalating demand for customer relationship management (CRM) software solutions, which are crucial for businesses aiming to streamline labor efficiency, enhance sales, and bolster profits. Freshworks offers a comprehensive array of tools assisting businesses in everything from employee onboarding to improving personalized customer engagement, marketing, and data analytics.
With AI being the most sought-after technology in recent times, it is unsurprising that Freshworks is progressively integrating it into its CRM offerings. For example, the introduction of the Freddy AI Agent facilitates automated yet personalized customer interactions, allowing human agents to focus on more complex queries.
Freshworks’ sales have benefitted significantly from its AI initiatives, soaring 22% in the most recent quarter. To reflect this positive momentum, the company has raised the midpoint of its full-year sales forecast by $5.1 million to a total of $715.1 million.
Crucially, Freshworks continues to attract larger clients, concluding the third quarter with 22,359 customers contributing at least $5,000 in annual recurring revenue, a 14% increase from the previous year. With a net dollar retention rate of 107%, existing customers are investing an average of 7% more year-over-year, which bodes well for sustained double-digit sales growth.
If Freshworks can maintain an average annual earnings growth rate of over 30% through 2028, its current forward P/E of 32 could potentially be seen as a steal.
What are the potential risks for investors following Alphabet’s significant reduction of its Snowflake holdings?
**Interview with Financial Analyst Jessica Thornton on Alphabet’s Strategic Investment Moves**
**Interviewer**: Jessica, thanks for joining us today. There’s been significant movement in Alphabet’s investments recently, especially regarding Snowflake and Freshworks. Can you explain the implications of Alphabet reducing its Snowflake holdings by 79%?
**Jessica Thornton**: Absolutely, and thanks for having me. Alphabet’s decision to drastically cut its stake in Snowflake signals a strategic pivot. By divesting such a large portion of their shares, Alphabet appears to be reallocating resources toward what it perceives as more promising investments in AI, particularly through Freshworks. Snowflake, despite its strong product offering and competitive advantages, has seen its growth projections slow, which may have triggered concerns among Alphabet’s investment team.
**Interviewer**: You mentioned Freshworks. What makes this AI-driven SaaS provider attractive to Alphabet right now?
**Jessica Thornton**: Freshworks is a dynamic player in the customer relationship management space, known for its user-friendly platform and integration of AI capabilities. Alphabet’s decision to quadruple its stake shows confidence that Freshworks will benefit from the AI boom. As AI adoption continues to accelerate, companies providing robust, scalable solutions will likely see uplifts in both customer acquisition and revenue.
**Interviewer**: Considering the broader economic landscape, with possible recession risks on the horizon and Snowflake’s high valuation, how should investors approach stocks in this segment?
**Jessica Thornton**: That’s a great question. Investors might want to adopt a cautious approach. While high-growth stocks like Snowflake had momentum during periods of rapid growth, the changing economic climate could lead to volatility. With Snowflake’s high price-to-earnings ratio and slowing growth rates, many traditional value investors may shy away. This could create opportunities for more tactical, short-term investing if market sentiment shifts, particularly if we see signs of a slowdown.
**Interviewer**: Looking ahead, how do you see AI’s influence on the market and potential winners emerging from this sector?
**Jessica Thornton**: AI is poised to be one of the defining technologies of our time. As analysts like those from PwC forecast substantial GDP growth attributed to AI advancements, we will likely see a myriad of companies emerge as leaders. However, the landscape will be competitive. Investors should watch for companies that not only leverage AI effectively but also maintain strong fundamentals and agile business models to adapt to shifting market needs.
**Interviewer**: Thank you, Jessica, for sharing your insights on these significant developments in the tech investment landscape.
**Jessica Thornton**: My pleasure! It’s a fascinating time to be watching these shifts unfold.