Alphabet: Li Lu's Strategic Trimming and the Case for a Near-Term Downgrade

The investment world is abuzz with news that Li Lu, the legendary value investor behind Himalaya Capital, has trimmed his stake in Alphabet (NASDAQ: GOOGL, GOOG) by nearly 19.5% in Q1 2025. While this move might raise eyebrows, it's critical to parse the nuances of Li Lu's strategy—and the broader market dynamics—to determine whether Alphabet's recent pullback signals a broader shift in sentiment. For investors, the question is clear: Should they follow Li Lu's lead and downgrade their expectations, or double down on Alphabet's long-term dominance?

Li Lu's Trimming: A Tactical Move or a Bearish Signal?

Li Lu's reduction of 592,700 Class C shares (GOOG) at an average price of $185—a 19.47% cut—marks a significant reallocation. Yet, Alphabet's combined holdings in both Class A and Class C shares still represent nearly 17.3% of his portfolio. This suggests Li Lu is not abandoning the stock but engaging in disciplined profit-taking after a multi-year bull run. Since 2020, his Alphabet stake has delivered an 89% gain, and trimming now could reflect a desire to lock in gains while retaining exposure to a company he still believes in.

But there's more to the story. Li Lu's Q1 moves included similar cuts to Bank of America (BAC) and Apple (AAPL), signaling a broader portfolio rebalancing rather than a sector-specific sell-off. His value-investment ethos prioritizes capital preservation and reinvestment opportunities, so Alphabet's trim may simply be part of a cyclical portfolio adjustment—not a vote against its long-term prospects.

Analysts Remain Bullish, but Risks Linger

Analyst sentiment remains overwhelmingly positive. Alphabet holds a “Strong Buy” consensus (29 Buys vs. 9 Holds) with an average 12-month price target of $199.11, implying nearly 20% upside from its June 2025 price of ~$166.18. Notable firms like Barclays ($220 target) and Goldman Sachs ($220) emphasize Alphabet's AI-driven growth and cloud computing dominance, which they see as insulated from near-term macroeconomic headwinds.

Yet, the bullish consensus overlooks critical risks. The advertising market, which fuels 65% of Alphabet's revenue, faces slowing growth as inflation and recession fears weigh on budgets. Competitors like Amazon and Meta (META) are also encroaching on its ad dominance. Meanwhile, Alphabet's moonshot projects—such as Waymo and health tech—require sustained capital investment without guaranteed returns. Regulatory scrutiny over antitrust and data privacy also loom large, potentially constraining future profits.

Why Consider a Downgrade Now?

While Alphabet's long-term narrative remains intact, three factors argue for a near-term cautious stance:

1. Valuation Stretch: At a P/E ratio of ~34x (vs. 24x for the S&P 500), Alphabet's premium assumes flawless execution in AI and cloud—a tall order in a volatile market.
2. Earnings Pressure: Q2 2025 EPS estimates of $2.16 (+15% YoY) are aggressive given slowing ad revenue. Even a minor miss could trigger a sharp sell-off.
3. Li Lu's Timing: His trimming at $185 suggests he's content with current gains. If other high-conviction investors follow suit, sentiment could sour.

Investment Strategy: Proceed with Caution

For investors, Alphabet's strong fundamentals—$260 billion in cash, 10%+ revenue growth, and AI leadership—make it a long-term hold. However, the near-term risks warrant a tactical downgrade to Hold until clarity emerges on ad revenue trends and regulatory outcomes.

Consider the following approach:- Sell 20–30% of holdings at current prices to lock in gains, especially if the stock approaches the $190–$200 resistance level.- Rebalance into defensive tech stocks (e.g., cybersecurity or enterprise software) or sectors less exposed to ad cycles.- Re-enter on dips: A breach below $150 could present a buying opportunity if fundamentals remain intact.

Conclusion: A Pause, Not a Sell

Alphabet's long-term story as a tech titan remains unbroken, but the confluence of valuation pressures, ad market risks, and Li Lu's strategic trimming creates a compelling case for caution. Investors should treat this as a chance to reassess allocations rather than abandon the stock entirely. The real test will come in Q2 earnings—miss that, and the “Strong Buy” narrative may unravel faster than Google's algorithms can process.

In the end, Li Lu's move isn't a death knell for Alphabet—it's a reminder that even the best investments demand periodic course corrections. For now, proceed with a disciplined Hold until the fog lifts.