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In the dynamic landscape of corporate investments, Google's parent company Alphabet (NASDAQ: GOOG, GOOGL) continues to stand out with strategic moves that attract considerable attention. Recently, Alphabet made significant additions to its already impressive $7 billion portfolio by bolstering its positions in two notable growth stocks. Both have the potential to provide high returns but naturally come with their own set of risks. Let's delve into the details.
1. GitLab
Alphabet significantly increased its holding in GitLab (NASDAQ: GTLB), augmenting its shares by a whopping 269% last quarter. With this addition, GitLab has now become the largest public holding in Alphabet's portfolio, valued at approximately $550 million. For those unfamiliar, GitLab is a comprehensive code repository management platform, akin to Microsoft's GitHub.
GitLab distinguishes itself by integrating a wide array of software development tools, enabling efficient code maintenance, issue tracking, and security. It operates on a freemium model, providing basic services for free while charging for advanced features and enterprise-level accounts. With over 30 million users and 1 million active license users, GitLab's strategy is evidently working.
The company recorded a substantial dollar-based net retention rate of 130% in the fourth quarter, indicating existing customers were spending about 30% more year-over-year. Moreover, GitLab saw a 52% increase in the number of customers spending over $1 million annually, rising to 96 clients. This fueled a 33% increase in its top line during the same period.
However, GitLab's management provided fiscal 2025 guidance that fell short of Wall Street expectations, predicting revenue between $725 million and $731 million, with earnings per share (EPS) of $0.19 to $0.23. This underwhelming forecast resulted in a March stock price drop. Despite GitLab's lofty valuation posing certain risks, its strong revenue growth, high gross margins, and operational efficiency suggest promising long-term earnings potential. It's a risky play, but with Alphabet as a fellow investor, it might be worth considering.
2. Prime Medicine
Another intriguing addition to Alphabet's investment portfolio is Prime Medicine (NASDAQ: PRME), where Alphabet increased its share count by 27% last quarter. This acquisition brings Alphabet's stake in the biotech company to 12.55%, with 15 million shares held.
Prime Medicine is pioneering in the realm of gene-editing therapies and has recently received FDA clearance for a phase 1/2 study targeting chronic granulomatous disease. The company's pipeline also includes several other therapies currently in the discovery or lead optimization stages. As Prime Medicine is still in its pre-revenue phase, its financial health hinges on its burn rate and available capital.
As of the end of the last quarter, Prime Medicine reported $210.7 million in cash and equivalents, bolstered by an additional $13.5 million in restricted cash, following a stock offering in February. Over the past year, the company has burned through approximately $200.6 million, a figure that continues to grow as they ramp up research and development. Given the current rate of expenditure, another capital raise is likely before any of its treatments hit the market, probably via new share issuance due to the cost of debt.
While Prime Medicine holds the potential to deliver groundbreaking treatments, its current financial fragility makes it a high-risk investment. Investors need to be cautious about their allocation in this stock, balancing the potential upside against significant downside risks.
In conclusion, Alphabet's investment strategy remains one to watch, with notable bets on companies like GitLab and Prime Medicine. Both offer substantial growth potential but come with their respective risks. Following Alphabet’s lead could be advantageous, provided you weigh the risks and manage your portfolio accordingly.
