Bill Ackman doesn't make small bets across dozens of stocks but instead focuses on a small number of players that have what it takes to soar over time. As of the end of 2023, his $10 billion portfolio at Pershing Square Capital Management included just seven positions. That's how the billionaire founder and chief executive officer of this hedge fund has delivered long-term winnings for investors, outpacing the S&P 500 over the past five years.
Ackman is applying this same strategy to the high-growth area of artificial intelligence (AI), making one big bet on a potential winner. In fact, this stock is one of his newest positions, with Ackman adding the shares just last year. And it's a considerable bet, making up nearly 20% of the billionaire's entire portfolio.
Which AI stock is Ackman going all in on? A player many of us know well thanks to its Google Search platform, one that holds more than 90% of the global market. I'm talking about Alphabet (GOOG -1.94%) (GOOGL -2.03%), a company with an "unmatched business model," according to Ackman. Let's take a closer look at why Ackman likes this growth stock and if it's an AI stock to buy now...
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Alphabet's strength in advertising
Ackman first bought Alphabet, taking a position across its two classes of shares, early last year when the stock was trading for less than 18 times forward earnings estimates. The top investor appreciates Alphabet's strength in the digital advertising market and the company's capital return program -- and Ackman is optimistic cost controls and efficiency gains in certain business areas may support margin expansion.
Alphabet already has a solid track record of earnings growth and its main source of revenue -- advertisements on Google Search -- have held up well even through difficult times like last year's high interest rate environment. For example, in the first quarter of last year, Google Advertising revenue stagnated, but by the fourth quarter, it climbed 10% year over year.
Now, let's turn to Alphabet's presence in AI. Ackman says Alphabet could become an AI winner for several reasons, including its access to quality training data, its solid distribution advantages, and technology expertise. In Pershing Square's recent annual report, Ackman suggested 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 at a time, for example, one hour of video, 11 hours of audio, and codebases with more than 30,000 lines of code. On top of that, Gemini 1.5 can analyze and summarize information, offering users answers to complex questions.
Gemini across Alphabet's products
This sort of development isn't just done to show Alphabet's technological prowess, though. Gemini 1.5 is being rolled out across Alphabet's products and services -- and this could lead to significant gains in earnings and a widening of margins over time.
For example, AI is improving Google's search results, transforming them from just a list of links to results including summaries, a variety of pages offering different perspectives on a subject, and more. AI also is making the AI advertising experience easier for advertisers, such as offering a conversational tool to help create campaigns.
Ackman considers Alphabet "one of the most advantaged and scaled players in AI," suggesting he's confident that this company will emerge as a winner in the market over the long haul.
Should you follow Bill Ackman?
So, what does all of this mean for you as an investor? Should you follow Ackman into Alphabet? A look at valuation shows that, as Alphabet has gained over the past year, its valuation has climbed too, with its forward P/E ratio reaching about 23.
But even at this level, the company looks like a deal considering Ackman's observations. Alphabet has demonstrated its ability to keep advertisers -- its biggest revenue source -- coming back even during difficult times. The company's AI investment is producing 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 may result in revenue gains there.
And we're still in the early days of AI so the biggest earnings opportunity may be down the road. All of this means billionaire investor Bill Ackman may be right to bet on Alphabet now, at the start of this AI story, and there's still time for you to join him in this potentially winning AI investment.
