Alphabet's $150bn gains offset AI infrastructure capex
Wedgewood Partners notes that Alphabet's massive unrealized gains in SpaceX and Anthropic effectively hedge the company's surging AI-related capital expenditures.
Alphabet Inc. was the top performance contributor for Wedgewood Partners in the second quarter, according to the investment firm’s latest investor letter. The tech giant closed at $353.81 on July 16, giving it a market capitalization of $4.31 trillion and a 52-week return of 90.28%. This occurred despite a recent 3.71% pullback over the past month.
Wedgewood pointed to exceptional operating momentum as the primary driver of the stock's rally. Google Search revenue grew 19% while Cloud revenue surged 63%, pushing operating income up 30%. The firm noted that Alphabet achieved this while expanding its gross asset base by more than 40% to roughly $450 billion, maintaining returns on capital above 30%.
The fund’s most compelling argument for Alphabet centers on its investment portfolio. Wedgewood highlighted over $35 billion in unrealized gains last quarter—mostly tied to SpaceX—and nearly $50 billion over the past six quarters. Alphabet also holds a 14% stake in Anthropic, which Wedgewood estimates could be worth over $100 billion based on recent funding rounds.
Wedgewood argues these potential gains act as a de facto hedge against the hardware inflation powering the AI boom. Companies like Anthropic and SpaceX are major drivers of surging demand and pricing for DRAM memory. Wedgewood estimates the combined $150 billion in unrealized gains on SpaceX and Anthropic could effectively cover Alphabet's incremental DRAM-related capital expenditure costs for several years.
This dynamic has significant implications for how investors should evaluate Big Tech capital allocation. While markets typically ignore "one-time" investment gains, Wedgewood views them as critical offsets to the massive, recurring expenses required to build AI infrastructure. The firm asserts Alphabet retains excess profitability to continue investing aggressively without impairing its core business.
Wedgewood's endorsement of Alphabet comes as the firm navigates a challenging market rotation. The Wedgewood Composite returned 9.4% in the second quarter, trailing the S&P 500’s 15.2% gain and the Russell 1000 Growth Index’s 16.7% return. Over 15 months, the fund's 25% return has significantly lagged the 90% surge in the S&P 500 Momentum ETF, hurt by momentum-driven trading bypassing its high-quality holdings.
Despite this underperformance, the firm is doubling down on the AI supply chain. Wedgewood has increased its investments in hyperscalers and redirected capital toward semiconductor and technology hardware stocks. While it warns that semiconductor equities carry cyclical volatility risks, it views well-capitalized hyperscalers as the most direct beneficiaries of the ongoing artificial intelligence buildout.
