Uh-Oh! Alphabet is selling its stake in 2 artificial intelligence (AI) stocks at an all-time high

Five weeks ago, there was what can be described as the most important data release of the third quarter — and I’m not referring to July’s inflation report.

No later than 45 calendar days after the end of a quarter (August 14 in the latter case), institutional investors with at least $100 million in assets under management must file Form 13F with the Securities and Exchange Commission. A 13F provides a clear list of whose stocks Wall Street’s brightest and often wealthiest investors bought and sold over the past quarter. Even though these snapshots are up to 45 days old when they are filed, they provide invaluable insight into the stocks, industries, sectors and trends that money managers have in mind.

Image source: Getty Images.

However, 13F filings are a must for more than just investment institutions. Some of the largest and most successful companies on Wall Street have sizable stakes in other businesses, including Nvidiaand are required to file a quarterly 13F.

One such company, which has invested nearly $2 billion in 42 stocks, is Alphabet (GOOGL 0.38%) (GOOG 0.39%)the parent of search engine Google, streaming platform YouTube and autonomous transportation service Waymo, among other ventures.

Alphabet is a great search engine… and more!

Most investors are familiar with Alphabet because of its world-leading Google search engine.

In August, Google accounted for a whopping 90.48 percent of global search, according to GlobalStats. In fact, Google has held at least a 90% monthly share of global internet search dating back more than nine years. That makes it a no-brainer for companies looking to target users with their messages, and gives parent Alphabet incredible ad-pricing power.

You are probably also familiar with YouTube, the second most visited social media site on the planet with approximately 2.5 billion monthly active users. The launch of Shorts — short videos of 60 seconds or less — in the second half of 2020 gave the company an additional opportunity to leverage ad revenue.

I’d be remiss if I didn’t also mention that Alphabet’s Google Cloud is the No. 1 cloud infrastructure services platform. 3 in the world by spend, with 10% of the market, per Canalys, as of the quarter ending in June. After years of losses, Google Cloud turned to recurring profits in 2023 and hasn’t looked back. Because cloud service margins often exceed advertising margins, this segment should be a key driver of cash flow for Alphabet throughout the rest of the decade.

But Alphabet is also an investor. It has almost a quarter of its portfolio invested in software developers for development, security and operations GitLaband over 16% of invested assets are tied Arm holds. Arm generates its revenue through licenses and royalties from chipmakers who use its designs to produce central processing units, graphics processing units and other hardware components.

However, it’s not what Alphabet is holding that raises eyebrows. Rather, it’s the two core artificial intelligence (AI) stocks that it sold in consecutive quarters.

Image source: Getty Images.

CrowdStrike Holdings

Investment managers at Alphabet have shown the door, in consecutive quarters, to be the provider of cybersecurity solutions. CrowdStrike Holdings (CRWD 3.35%). After reducing its stake in CrowdStrike by a third in the quarter ending in March, Alphabet reduced its remaining position by another 50% (427,894 shares) in the quarter ending in June. CrowdStrike is now Alphabet’s fourth-largest position, down from No. 2, where it started in 2024.

Rating is probably the culprit behind this selling activity. Even though CrowdStrike has blown the door out of Wall Street’s consensus growth forecasts for years, it traded on price-to-sales (P/S) and price-to-earnings (P/E) ratios. The earnings freeze was probably considered a prudent move.

The more recent concern with CrowdStrike — albeit one dating back to July that wouldn’t be detailed by the latest round of Form 13Fs — is a botched update to its Falcon security platform that caused significant downtime for certain industries and customers. It’s not uncommon for these entanglements to cost cybersecurity companies revenue in the short term.

On the bright side, CrowdStrike’s bug was self-inflicted and had nothing to do with a cyber attack. Prior to this July outage, companies had demonstrated a willingness to pay a premium for CrowdStrike’s services given its history of breach protection.

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

The cherry on top for CrowdStrike is that cyber security solutions have evolved into a core service. No matter how good or bad the US economy is, companies with an online or cloud presence need to protect their data.

While Falcon’s cloud-native platform becomes more efficient over time thanks to artificial intelligence, Alphabet’s brightest investment minds may regret their decision to sell their two-thirds stake in CrowdStrike.

DexCom

The other AI stock that Alphabet’s investment team dumped for two consecutive quarters is a medical device giant DexCom (DXCM 0.83%). After shedding just north of 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 participation no. 1 of Alphabet dropped to 6th place and now represents about 6% of invested assets.

Like CrowdStrike, valuation has long been the glaring red flag with DexCom. Although it has grown sales at a relatively steady rate of about 20% for years, DexCom’s forward P/S and P/E ratios have always been attractive.

The more pressing concern lately for DexCom is what might happen to its business as a result of glucagon-like peptide-1 (GLP-1) agonist drugs hitting the market. GLP-1 therapies have been shown to reduce weight in patients taking them, and obesity is a common comorbidity for people with diabetes. Although studies have shown that patients using GLP-1 drugs are more likely to use CGM, DexCom’s second-quarter operating results, which were reported in July (ie, after the 13F was filed), did little to allay these concerns.

DexCom lost 40% of its value in a flash after it lowered the midpoint of its full-year sales guidance by about $250 million and highlighted a list of challenges during the quarter. CEO Kevin Sayer pointed to lower revenue per user and restructuring of his company’s sales team as key reasons for the shortfall. In particular, Sayer believes that the lack of sales team coverage in certain geographic areas has led to a reduction in the company’s patient base.

If there’s an advantage here, it’s that DexCom is one of the top two vendors of CGM devices and should, in theory, benefit from the large number of people diagnosed with diabetes in the US and climbing worldwide.

DexCom can also rely on its various AI solutions to differentiate itself and deliver value to its users. This includes everything from glucose control for its infusion pumps to helping users with dietary assessments to optimize their blood glucose levels.

But the nature of DexCom’s revenue loss is troubling, to say the least. Color me not surprised if Alphabet continues to remove DexCom from its investment portfolio in the quarter ending in September.