Some super-wealthy investors strongly believe in diversification. But not all of them. Bill Ackman is a good case in point.
Ackman's net worth currently stands at $3.6 billion, according to Forbes. His Pershing Square Capital Management owns only eight positions. And two of them are Google parent Alphabet (GOOG 0.92%) (GOOGL 0.93%), with the hedge fund holding both the class A shares and the class C shares.
What's more, Ackman just upped his bet on Alphabet. Here's why that could be a smart move.
Googling it in Q2
Ackman's Pershing Square portfolio included only six stocks at the end of 2022. Alphabet wasn't one of them.
That changed in the first quarter of 2023. Ackman bought more than 8 million shares of Alphabet Class C stock and nearly 2.2 million shares of the company's Class A stock.
The billionaire was back at it in Q2. He bought an additional 1.3 million Class C shares of Alphabet for his hedge fund. Pershing Square's total position in the technology giant now tops $1.5 billion. Alphabet makes up nearly 13% of the fund's portfolio.
Ackman's big bet on Alphabet is already paying off nicely. The stock price has skyrocketed close to 50% year to date. More than half of that impressive gain came after the end of the first quarter when Pershing Square already had a significant position built up.
Easy as A-B-C
Why could Ackman upping his bet on Alphabet be a smart move? I think it's as easy as A-B-C.
The A stands for artificial intelligence (AI). Much of Alphabet's huge gain rise in 2023 has been the result of investors' excitement about all things AI. That's understandable, because AI should provide a massive opportunity for the company.
Alphabet CEO Sundar Pichai noted in the latest quarterly update that the company is already using generative AI to improve advertising on its platforms. Its Google Cloud infrastructure and tools are also attracting customers seeking to develop AI apps. I predict that Google Cloud's business will expand dramatically over the next decade and beyond, with much of its growth driven by AI.
The B is for "bounce." Alphabet's financial results were dampened in recent quarters due to an overall slowdown in digital advertising spending. But the digital ad market now appears to be bouncing back. Alphabet should especially have significant potential to increase advertising revenue with YouTube Shorts, YouTube Select, and YouTube TV.
What does the C stand for? Cheap -- at least on a relative basis. Alphabet offers the most attractive valuation of the top-tier AI stocks, in my view. Its shares trade at around 23 times expected earnings. That forward earnings multiple is much lower than the levels of Amazon, Microsoft, and Nvidia and is slightly below Meta Platforms' forward P/E ratio.
A few risks with Alphabet
Ackman does face a few risks with his increased bet on Alphabet. I think the biggest one over the near term is the possibility of an economic downturn that weighs on the company's growth. However, it's encouraging that even the Federal Reserve is no longer predicting a recession on the horizon.
There's also a possibility that AI hurts Alphabet over the long term more than it helps. Bill Gates warned earlier this year that an AI-powered personal digital agent could radically disrupt the search market. With Alphabet depending so heavily on search revenue, the future Gates envisions could be catastrophic for the company.
I don't think investors should be worried about such a dire future at this point. Obviously, Ackman doesn't have major concerns either. He's betting that Alphabet will make him even more money. I suspect that bet will continue to pay off.
