Bill Ackman doesn’t place small bets on dozens of stocks, but instead focuses on a small number of players that have what it takes to rise over time. At the end of 2023, his $10 billion portfolio at Pershing Square Capital Management included just seven positions. That’s how the billionaire founder and CEO of this hedge fund has delivered long-term profits to investors, outperforming the S&P 500 over the past five years.
Ackman is applying the same strategy to the fast-growing field of artificial intelligence (AI), taking a big gamble on a potential winner. In fact, this stock is one of his newest holdings, with Ackman adding the stock last year. And it’s a significant gamble, considering it makes up almost 20% of the billionaire’s entire portfolio.
Which AI stock is Ackman going all-in on? A player that many of us know well thanks to the Google Search platform, which controls more than 90% of the global market. I’m talking about Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), a company with an “unparalleled business model,” according to Ackman. Let’s take a closer look at why Ackman likes this growth stock and whether it’s an AI stock to buy now…
The power of Alphabet in advertising
Ackman first bought Alphabet early last year, taking a position in its two share classes, when the stock was trading for less than 18 times forward earnings estimates. The top investor likes Alphabet’s strength in the digital advertising market and the company’s capital return program – and Ackman is optimistic that cost control and efficiency improvements in certain business areas can support margin expansion.
Alphabet already has a solid track record of earnings growth, and its main source of revenue – advertising on Google Search – has held up well, even in tough times, such as last year’s high interest rate environment. For example, in the first quarter of last year, Google Advertising revenues were stagnant, but in the fourth quarter they rose 10% year over year.
Now let’s take a look at Alphabet’s presence in AI. Ackman says Alphabet could be an AI winner for several reasons, including its access to high-quality training data, its solid distribution advantages and its technological expertise. In Pershing Square’s recent annual report, Ackman suggested that the market may be overlooking a potentially game-changing development at Alphabet: the release of its most powerful AI model yet, Gemini 1.5.
This AI platform can process enormous amounts of information simultaneously, for example an hour of video, 11 hours of audio and codebases with more than 30,000 lines of code. Additionally, Gemini 1.5 can analyze and summarize information, providing users with answers to complex questions.
Gemini in Alphabet products
However, these types of developments are not just done to demonstrate Alphabet’s technological prowess. Gemini 1.5 is being rolled out across Alphabet’s products and services – and this could lead to significant earnings gains and margin expansion over time.
For example, AI improves Google search results, transforming them from just a list of links to results that include summaries, a variety of pages that offer different perspectives on a topic, and more. AI also makes the AI advertising experience easier for advertisers, for example by offering a conversational tool to create campaigns.
Ackman considers Alphabet “one of the most privileged and large-scale players in AI,” suggesting that he is confident that this company will emerge as a winner in the market in the long term.
Should you follow Bill Ackman?
What does this all mean for you as an investor? Should you follow Ackman in Alphabet? A look at the valuation shows that just as Alphabet has gained over the past year, its valuation has also risen, with the price/earnings ratio coming in at around 23.
But even at this level, the company seems like a deal, given Ackman’s observations. Alphabet has demonstrated its ability to keep advertisers – its biggest source of revenue – coming back, even in tough times. The company’s AI investment is yielding promising results that could boost Alphabet’s revenue in two ways: AI applied to search will strengthen that business, and AI tools sold to Google Cloud customers could lead to revenue gains there.
And we’re still in the early days of AI, so the biggest opportunities for profit may lie ahead. All of this means that now, at the start of this AI story, billionaire investor Bill Ackman may be right to bet on Alphabet, and there’s still time to join him in this potentially winning AI investment.
Should you invest €1,000 in Alphabet now?
Before you buy shares in Alphabet, consider the following:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Alphabet wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $535,597!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns April 15, 2024
Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Adria Cimino has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
Billionaire Bill Ackman has invested nearly 20% of his Pershing Square portfolio in this artificial intelligence (AI) growth stock, originally published by The Motley Fool
