Arauca Capital: Alphabet ($GOOGL) Investment Case
Introduction In their H2 2024 investor letter, Arauca Capital outlines their investment in Alphabet, highlighting it as a high-quality business currently trading at an attractive valuation with significant optionality from its “Other Bets” divisions. The firm employs both a direct stock position and a strategic derivatives structure to gain exposure to Alphabet, reflecting their strong conviction in the company’s long-term value proposition despite market concerns about AI disruption to its core search business.
Investment Highlight: Alphabet (GOOGL/GOOG)
Position Structure
- Small direct stock position combined with a larger derivatives play
- Risk reversal strategy with out-of-the-money call options expiring December 2026
- Zero-cost setup with covered put options secured by treasury bills
- Same structure successfully employed with Super Micro in 2023
Valuation Assessment
- Entered at approximately 18x forward earnings
- Considered a modest multiple for such a high-quality business
- Core existing business lines valued reasonably
- “Other Bets” divisions represent effectively a “zero-cost multi-strike call option” on transformative technologies
Core Business Analysis
- Search Business Strength:
- 16% compound annual growth rate (CAGR) in revenue since 2017
- 13% growth in 2024 alone
- Over 5 trillion annual search queries (14 billion daily)
- Significant increase from 365 billion searches in 2009 and 2 trillion between 2016-2024
- AI Integration in Search:
- AI overviews driving monetization rates similar to traditional search
- Higher user satisfaction and increased overall search usage
- “Circle to search” feature accounts for over 10% of searches among users
- Google Lens processing 20 billion queries monthly
- Ecosystem Advantages:
- Search integration with Google Maps (2+ billion users) and YouTube
- High switching costs for users embedded in the ecosystem
- Search behavior described as “more than habit” but “ingrained behavior”
- Additional Revenue Streams:
- YouTube achieved $50 billion in yearly revenue
- Became #1 U.S. streamer in terms of watch time
- Android with 3 billion users worldwide (1.5 billion new devices yearly)
- Cloud business growing at 30% with operating margins reaching 17.5%
“Other Bets” Value Assessment
- Waymo (Autonomous Driving):
- Vehicles average 95,000 miles between human interventions vs. Tesla’s 17 miles
- Scaling rapidly: 200,000 rides per week, up from 10,000 in early 2023
- Currently operating in only three cities with significant expansion potential
- Vehicle costs expected to decrease significantly with shift to Hyundai fleet
- Potential spin-off could unlock “hundreds of billions” in value
- Isomorphic Labs/DeepMind:
- Leverages AlphaFold technology for AI-driven drug discovery
- Secured partnerships with Eli Lilly and Novartis worth potentially $3 billion
- Benefits from integration with Google’s computational infrastructure
- Positioned at intersection of AI and pharmaceutical development
- Quantum Computing/Willow:
- Positioned for “next S-curve after AI”
- Claims ability to solve complex problems in minutes that would take traditional supercomputers “10 septillion years”
- Potential applications in drug discovery, cryptography, and complex system modeling
- Seen as one of few companies likely to achieve breakthrough quantum capabilities
Market Concerns & Management Response
- Market fears about search disruption from AI startups like Perplexity
- Perception that Google is “behind the curve” in AI development
- Founder involvement increasing with Sergey Brin urging employees to boost productivity on Gemini AI
- Brin characterized AGI development as “the final race” and affirmed Google’s readiness to win
Arauca Capital views Alphabet as an exceptional investment opportunity, offering both a reasonably valued core business and significant optionality through its “Other Bets” divisions. They emphasize that at current valuation levels, investors effectively get Waymo, Isomorphic Labs, and quantum computing initiatives “for free,” representing potential future value that is “very difficult to estimate” but could be worth “hundreds of billions.”
