The average investor can learn a lot by following some of the professionals in the industry. Bill Ackmanwhose strategy — likely influenced by the great Warren Buffett — focuses on making concentrated bets on high-quality companies trading at attractive valuations.
Ackman’s hedge fund companycalled Pershing Square Capital Management, currently manages $10.8 billion in assets. Rather than blindly following his portfolio decisions, investors should try to understand why he owns what he owns.
One of Ackman’s key investments is tech giant Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG)Let’s take a look at what factors drew the hedge fund manager’s attention to this dominant “Magnificent Seven” company.
Quality company
Pershing Square first bought shares in Alphabet more than a year ago, in the first quarter of 2023. It may be surprising to see it quickly become a huge position. But Ackman went so far as to call it “one of the world’s best companies.” That may be a bold statement, but I wouldn’t disagree with his assessment.
Most readers are familiar with Google Search. With a 91% share of the global search industry, it is undoubtedly Alphabet’s bread-and-butter segment. Ackman calls its powerful network effects and high barriers to entry.
YouTube, which the company acquired in 2006 for more than $1.6 billion, also deserves some attention. Not only does it have network effects, but it also bolsters Alphabet’s dominance in the digital advertising industry. Ackman believes the company is well-positioned to continue growing its sales over time as offline advertising shifts to online methods.
Alphabet is poised to benefit from another secular trend: cloud computing. As IT spending shifts from on-site to off-premises, Google Cloud should continue its ascent. The segment posted 26% revenue growth in 2023 and is now generating consistent operating profits.
If you look at the Pershing Square portfolio, you’ll realize that Ackman values companies that are in strong financial positions. There are few companies in the world that can match Alphabet in this regard. As of March 31, the company had $13.2 billion in long-term debt on its balance sheet. However, the company had $108.1 billion in cash, cash equivalents and marketable securities, virtually eliminating any financial risk.
AI Leader
The artificial intelligence (AI) boom is drawing a lot of attention from the investment community. After Chat GPT first launched in late 2022, the market worried that Alphabet would fall behind rivals in developing the technology and introducing new features. But Ackman believes those concerns were overblown.
Alphabet used AI in search as far back as 2001. And nearly all of its offerings, from YouTube and Maps to Gmail and Google Cloud, use AI in some way. The fact that the company has such a broad reach means it can launch new AI features with almost instant adoption. What’s more, Alphabet has the financial resources and technological know-how to become one of the leaders in AI going forward.
Is it too late to buy Alphabet stock?
With hindsight, Ackman’s purchase of Alphabet stock seemed like an incredibly timely move. When his firm began buying the stock, it was trading at an attractive forward price-earnings ratio (p/e) from just 16. This investment has paid off so far, with shares up 109% over the past 18 months.
Of course, things aren’t quite so clear-cut these days. At the time of writing, Alphabet shares are selling at a forward P/E multiple of 24.4. While not as good as the price Ackman paid, I still think that valuation makes the stock a smart buy today.
Should You Invest $1,000 in Alphabet Now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Neil Patel has no position in any of the stocks mentioned. The Motley Fool has 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 “Magnificent Seven” Stock was originally published by The Motley Fool
