The record of Bill Ackman’s hedge fund, Pershing Square Capital Management, is top-notch. Fortunately, investors can access this fund through Pershing Square Holdings, a FTSE 100-listed investment trust.
In the past five years, Ackman’s fund has generated a 31% annualised return, which is roughly double the performance of the S&P 500. And amazingly, he managed to outperform the US market last year while holding just a single ‘Magnificent Seven’ tech stock. And that wasn’t even Nvidia!
That share was Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), the parent company of Google and YouTube. Here’s why Ackman owns this artificial intelligence (AI) stock.
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Buying the fear
Warren Buffett famously said: “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
This also sums up how Ackman approaches the market. He owns very few stocks (between eight and 12 at any point) and will wait years for a high-quality business to go on sale. Then he greedily backs up the truck.
In 2016, he did this with Chipotle Mexican Grill after cases of food poisoning in some restaurants sent the shares crashing.
Last year, he repeated the trick after Alphabet stock sold off due to fears that Google’s search empire was under threat from ChatGPT. He first started buying in Q1 at an average price of around $94. Fast-forward to today, the share price is $173.
In Pershing’s 2023 results, Ackman wrote: “Over the longer term, we believe Google’s access to high-quality training data, its substantial distribution moat, its AI-optimized infrastructure and deep technical expertise are durable competitive advantages.”
Naturally though, he doesn’t get every call right. He sold Netflix stock in April 2022, losing round $400m on the trade. Soon after, shares of the streaming giant jumped almost 30%.
A mighty quarter
On 26 April, Alphabet reported an incredibly strong Q1. Revenue rose 15% year on year to $80.5bn, breezing past Wall Street’s expectations for $78.6bn.
Net income surged 57% to $23.7bn, smashing expectations for $19.1bn.
What I found impressive was that growth was broad based, with advertising revenue in search and at YouTube growing by double digits. Also, Google Cloud revenue soared 28% as customers scrambled to tap into its vast computing power to train their generative AI large language models (LLMs).
Meanwhile, efficiency savings boosted the operating margin from 25% to 32%. And finally, Alphabet declared its first ever dividend and intends to pay a quarterly one from now on.
Investors rewarded this flawless quarter by sending the firm’s market-cap above $2trn for the first time.
Competitive edge
One big risk here is competition, notably from Microsoft and its huge investments in ChatGPT maker OpenAI. If Google starts losing market share, the stock would likely come under immediate pressure again.
Indeed, I think this uncertainty is still weighing on the stock somewhat because it’s trading for just 23 times forward earnings. For a firm at the very forefront of the AI revolution, that’s dirt cheap, I’d argue.
Moreover, I suspect a potential TikTok ban would boost YouTube figures. The average user already spends 30 minutes to an hour every day on YouTube.
Therefore, I’d consider buying this AI stock today if I didn’t already own it.
