Third Point made 'substantial investment' in Alphabet as shares fell on Google's Gemini fiasco

By Louis Goss

Third Point made a "substantial investment" in Alphabet when shares in the Google owner fell in early March due to the fiasco surrounding the launch of its AI tool Gemini, the hedge fund said in its first quarter investor letter.

Daniel Loeb's hedge fund said it took advantage of the drop in the tech giant's share price by buying a stake, as "Gemini's initial blunders further contributed to the narrative that Alphabet will end up an AI loser," the letter shows.

In February, Google pulled its Gemini image generation tool following a social media storm over its portrayal of historical figures - ranging from U.S. founding fathers to Nazi German soldiers - as people of color.

"Assigning primacy to a small operational misstep while demoting the fact that the company has been building world-class capabilities in AI for over a decade, created an attractive entry point for a long-term investor," Third Point said.

Third Point said that "unlike in past periods of technological paradigm shifts" it believes the AI arms race will boost the "best-run legacy companies" like Microsoft (MSFT) and Amazon.com (AMZN) that are now using their "financial and intellectual war chests" to build "enormous competitive advantages."

In the case of Alphabet (GOOGL), Third Point said the Silicon Valley company has a "substantial distribution and technology advantage over competitors," having pioneered the technology and built two of the world's leading AI research organizations, Google Brain and DeepMind.

Third Point said Alphabet is now has an opportunity to use its AI capabilities to "unify, enhance and better monetize the entire suite of products," as the hedge fund said it believes "the moment when Gemini takes a seat at the economic table is approaching."

The hedge fund said Google also has potential to become "increasingly important as a source of truth" on an internet ever more "full of AI fakes," even as it acknowledged that fears surrounding the threat to the search engine posed by chatbots are "not entirely unfounded."

The event-driven hedge fund posted returns of 7.8% from its flagship TP Offshore Fund, compared to gains of 10.6% on the S&P 500 and gains of 9% on the MSCI World Index.

Third Point, which has $11.5 billion worth of assets under management, said it is also betting on Taiwan Semiconductor Manufacturing Company (TSM) (TW:2330) and the London Stock Exchange Group (UK:LSEG) to benefit from the AI boom.

The investment fund said it upped its stake in TSMC in the first quarter, as it argued the Taiwanese semiconductor company is well placed to profit on the rise of AI computing due to already holding a 90%+ share of the market for top-end chips.

The New York investor, which was founded in 1995, said LSEG's push to integrate AI into its market data products puts it in a position to benefit from uptake of generative AI in the financial services sector.

Third Point also said the rise of AI will see U.S. electricity demand grow for the first time in decades, as it predicted the buildout of data centers will see global power demand increase by 800 TWh by 2030, with half of that demand set to come from America.

The hedge fund said it believes U.S. independent power producer Vistra (VST) is in "pole position" to capitalize on growing demand for electricity, as a supplier of nuclear and natural gas-fired power to fill gaps in the electricity supply left by intermittent renewables, such as wind and solar.

Vistra ranked as one of Third Point's top five "winners" for the first quarter of 2024, alongside Meta Platforms, Amazon.com, Bath & Body Works, and Microsoft.

The top five losers for the quarter were Pacific Gas & Electric (PCG), DuPont de Nemours (DD), Humana (HUM), Marvell Technology (MRVL), and an undisclosed short position, Third Point said.

-Louis Goss

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05-02-24 0448ET

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