George Soros (Trades, Portfolio) is a legendary investor and trader who is the founder of Soros Fund Management. Soros is known for his macroeconomic trading style and generating $1 billion in a single day via his short of the British pound in the 90’s.
The Soros Fund just released its 13F filing for the fourth quarter of 2022, revealing that as of the quarter's end, it had 13F holdings worth $4.38 billion in 160 stocks. The quarter was extremely active for the fund, as it was buying shares of 27 stocks. Its bigger buys may be the ones more discussed on the news, but I want to focus on two smaller buys that caught my attention: SoFi Technologies (SOFI, Financial) and both classes of shares of Alphabet Inc. (GOOG, Financial)(GOOGL, Financial).
1. Alphabet
Alphabet (GOOG, Financial)(GOOGL, Financial) owns the world's most popular search engine Google, which accounts for over 84% of all search traffic globally, according to data from Statista. The company also owns the market leading video based platform (some even dub it a “search engine” of its own), YouTube. In addition, it owns the most popular mobile operating system, Android, which is utilized by the vast majority of non-Apple (AAPL, Financial) devices.
Recently, Google has been caught off guard after OpenAI’s ChatGPT platform went viral and Microsoft (MSFT, Financial) partnered with it to upgrade its own search engine Bing. Some believe this could mean Bing will disrupt Google's long-held dominant market position. Microsoft was an early investor into OpenAI, and recently invested a further $10 billion into the platform. In a recent interview with the Wall Street Journal, Microsoft CEO Satya Nadella announced plans to integrate OpenAI’s system into Microsoft products such as the Bing search engine. The goal would be to lure people away from Google, which would then impact its lucrative advertising business.
Google rushed to announce its ChatGPT competitor Bard.ai, which then went on to make a mistake in a demo. While ChatGPT also makes mistakes, it didn't make such a big one on its public demo. Bringing this all together along with the cyclical decline in advertising revenue, it's no surprise Alphabet's share price is down by over 36% since its highs in December 2021.
There is positive news for Alphabet though. Bing's integration with ChatGPT is still in its beta stage with a waitlist offering. In addition, I discovered from a Stanford lecture that Google’s PaLM AI system is close to three times more powerful than OpenAI’s GPT 3. PaLM has 540 billion parameters versus GPT-3 at 175 billion. Therefore I believe the mainstream news rhetoric that Google is “dead” is or has lost the AI race is overblown.
Mixed financials
Alphabet mixed financial results for the fourth quarter of 2022. Its revenue increased by just 1% year over year to $76 billion. This may seem atrocious, but keep in mind we are currently going through a downturn in the advertising market, driven by the ongoing economic recession. Given Alphabet generates ~90% of its revenue from advertising, it is widely susceptible to changes in this market.
The good news is the advertising industry tends to be cyclical by nature and thus I would expect a bounce back in the long term. In addition, the company’s international revenue was impacted by foreign exchange rates, as the U.S. dollar strengthened.
A positive is Alphabet's cloud business continued to grow and reported $7.3 billion in revenue, which increased by a blistering 32% year over year. Alphabet is now the third largest cloud infrastructure provider in the world (according to Statista data) and is poised to benefit from growth in digital transformation.
On the earnings front, Alphabet reported earnings per share of $1.05, which came in below analyst expectations by $0.14.
This was driven by the slowing revenue growth as well as an 8.2% increase in operating expenses. A positive is Alphabet has continued to invest heavily into research and development and increased its R&D by a solid 18% year over year to $10.27 billion.
Valuation and guru investors
Alphabet trades at a price-earnings ratio of 18.42, which is over 31.6% cheaper than its five-year average.
The GF Value chart indicates a fair value of $144 per share, meaning the stock is “significantly undervalued” at the $94 per share price at the time of writing.
Soros Fund Management purchased 46,600 shares of GOOG in the fourth quarter, which is the class C shares of Alphabet without voting rights. In addition, Soros added an another 743,160 shares of class A Alphabet stock, GOOGL. During the quarter, GOOGL shares traded at an average price of $95 per share, which is close to where the stock trades at the time of writing. Soros owned a total of 1.756 million class A shares at the end of the quarter, with a market value of $161.5 million.
Other investors who purchased Alphabet shares recently include Baillie Gifford (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Tom Gayner (Trades, Portfolio).
2. SoFi Technologies
SoFi Technologies (SOFI, Financial) is a leading fintech company which initially specialized in student loan refinancing before expanding to other areas from auto loans to mortgages, credit cards and more.
The business has grown its platform substantially over the years and increased its brand massively through the sponsorship of the “SoFi Stadium” in 2020. This stadium cost over $5.5 billion to develop and held the Super Bowl in 2022, which is the most popular sporting event in the U.S. and one of the most popular in the world.
Super financials
SoFi reported strong financial results for the fourth quarter of 2022. Its revenue was $443.42 million, which increased by a blistering 72.5% year over year and surpassed analyst forecasts by $27.48 million. This was exceptional growth and diversified across its three main segments: Lending, financial services and its technology platform.
Even more amazingly, this growth was achieved despite a 21% decline in new loans, which was due to home loans declining by 84%. This was mainly driven by the rising interest rate environment, which has suppressed the housing market.
SoFi has actually benefited from the higher interest rates in aggregate, as its net interest income rose by a rapid 138% year over year.
SoFi is facing headwinds from a student loan pause across the U.S., which was initially put in as a pandemic protection measure. The Biden administration even has bold plans to cancel about $10,000 worth of student debt for those who earn less than $125,000 a year. However, this has been protested by political rivals who claim to be concerned about the country's debt situation (the U.S. makes money from student loans, which is why they have gotten so high to begin with and cannot be gotten rid of even in bankruptcy). The court decision will be a key factor to watch for SoFi as it could impact its business positively or negatively.
The company is still struggling on a profitability front and reported a loss per share of $0.04 in its latest quarter. The good news is this metric surpassed analyst expectations of a per-share loss of $0.08.
Valuation and guru investors
SoFi trades at a price-sales ratio of 4, which is significantly cheaper than its historic average.
In the fourth quarter of 2022, George Soros (Trades, Portfolio) loaded up on 1.25 million shares of the stock. The quarter's average price was $4.96 per share. This is 36% cheaper than where the stock trades at the time of writing.
Final thoughts
Both Alphabet and SoFi are fantastic technology companies which are both facing temporary headwinds. Alphabet is experiencing a cyclical downturn in the advertising market, as well as threats on both its AI and search engine front. This has heightened the competitive environment for the first time in decades. However, the company does have advanced AI to maintain its market share and compete effectively, so I believe the initial fear may be unjustified. SoFi on the other hand has still continued with rapid growth despite headwinds, but all eyes will be on whether students in the U.S. will get relief from their debt.
