Alphabet (GOOGL, Financial) (U.S.) was the top contributor to the Fund’s performance for the quarter. Alphabet’s first-quarter search revenue growth accelerated slightly sequentially, which was notable given that advertising spending has decreased across the board. Management cited the company’s travel and retail segments for their strong performance in contrast to the declines experienced in the finance and in the media and entertainment businesses. Advertising spending has also stabilized at YouTube, and the focus on “shorts” has driven strong viewership growth. In the near term, YouTube’s investment in shorts may not generate significant revenue, but we believe its profitability will accelerate over time. Alphabet’s cloud business reached GAAP profitability this quarter, moving from a -12% margin this quarter last year to a 3% margin this quarter. On the AI front, Alphabet upgraded Bard to run on its more powerful PaLM language model, and Bard can now assist with coding and software development. CEO Sundar Pichai compared AI’s evolution to the transition from desktop to mobile computing a decade ago and said there is “a lot more to come” in terms of its consumer AI applications. CFO Ruth Porat revised 2023 capital expenditures guidance due to higher spending on data center construction and servers that will support AI developments in consumer products, advertiser tools and the cloud business. Porat reiterated that the company plans to continue to hold expense growth below revenue growth and that Alphabet’s cost-reduction initiatives should bear fruit later this year and into 2024. At Alphabet’s annual developer conference in May, the company showcased an impressive array of new AI-powered consumer tools, which will be rolled out over the course of the year. Investors reacted positively to these presentations, which highlighted the extent of AI innovation occurring at Alphabet.
From David Herro (Trades, Portfolio) and Bill Nygren (Trades, Portfolio)'s Oakmark Global Select Fund second-quarter 2023 commentary.
