Whether you like or dislike her politics, one thing former House Speaker and current Rep. Nancy Pelosi has proven to be is a great investor. She, or whoever is making her investment decisions, has had a knack especially when it comes to investing in technology stocks.
Earlier this month, it was disclosed that Pelosi sold shares of Apple while buying positions in Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG). Both new investments were done in the form of call options, which give investors the right to buy a stock in the future at a certain strike price. In both cases the call options were in the money, which means the stock prices are currently above the strike prices.
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Call options are considerably more risky than just buying a stock, as call options can become worthless if the price of the stock is below the option price when the option expires. In the money options can be a little less risky since the stock price is already above the strike price when the investment is made. However, this is still a more leveraged and risky investment.
For her portfolio, Pelosi bought 50 call options of both Alphabet and Amazon at a $150 strike price expiring in January 2026. Each position would be valued at between $250,000 and $500,000.
Should investors follow suit and buy the two stocks?
Alphabet
Given that Alphabet recently lost an antitrust lawsuit filed by the U.S. government, Pelosi's options investment in the company could certainly raise some eyebrows. However, it can also be argued that Alphabet is undervalued whether on a stand-alone basis or broken up.
The company has a number of businesses that would likely trade at higher valuations as stand-alone stocks. First and foremost is its fast-growing cloud unit, Google Cloud. Cloud computing is very hot and there is no pure play in the space. Alphabet's Google Cloud segment grew its revenue by 35% last quarter as customers have clamored for its services to help them build out their own artificial intelligence (AI) models and applications.
The segment also has its own AI chip that it developed with the help of Broadcom that it credited with reducing costs and lowering inference processing times. With the unit recently seeing a big profitability inflection point (its operating income surged from $266 million to $1.95 billion last quarter), this business would be highly valued as a stand-alone unit.
Meanwhile, Alphabet has two emerging businesses with quantum computing and robotaxis. While neither are profitable yet, they offer strong potential upside in the future and both businesses are leaders in the space. Within Alphabet, they are more like long-dated call options, but they would likely get a nice premium as separate entities.
Then of course with Alphabet investors are also getting its core Google search, YouTube, and adtech businesses as well. These are all very valuable market-leading businesses. What happens with the antitrust penalties is still an unknown, but with President Donald Trump now in office it could possibly be a more favorable regulatory environment for big tech companies.
Trading at a forward price-to-earnings (P/E) ratio of about 19 times, the stock looks like a bargain and I'd be a buyer.
Image source: Getty Images.
Amazon
Alphabet and Amazon share a few things in common. One big one, which could account for Pelosi's investments, is that they are both big cloud computing companies. Amazon's AWS is the market share leader in the space with a 31% share. AWS is also the company's largest business by profitability and its fastest-growing segment, with revenue jumping 19% last quarter.
If Pelosi is bullish on cloud computing, Amazon is a good investment option. Similar to Alphabet, the company is seeing strong uptake from customers looking to build out their own AI models and applications. Meanwhile, its BedRock service offers foundational models that can be customized in this pursuit, while its SageMaker platform helps train and move these models into production. Amazon also developed its own AI chips using some intellectual property from Marvel.
Outside of the cloud, like Alphabet Amazon is also a leading digital advertising company. This largely comes from sponsored ads on its platform. This is a growing, high-margin business. And of course, Amazon is the world's leading e-commerce and logistics company. It's using AI to help both customers and sellers, as well as with logistics and warehousing.
Amazon has shown to be a very innovative company that is willing to spend big to win big, so with AI being a big opportunity, it is not a company I would count out. As the leader in cloud computing and e-commerce, Amazon continues to have a bright future ahead. The stock currently trades at a forward P/E of under 31 times, which is a reasonable valuation based on historical multiples.
GOOGL PE Ratio (Forward 1y) data by YCharts
Overall, I think Alphabet and Amazon are both strong market leaders that investors can buy and hold for the long term. However, options trading can be an extremely risky proposition, so I would not recommend that individual investors buy options on the stocks.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Amazon, and Apple. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
