What's the most worrisome problem about investing in a hot new area? It's that the companies that emerge as early leaders might not have staying power. You could end up pouring money into a stock that turns out to be a dud while missing out on the real winners.
This fear is likely on the minds of some who are looking to take advantage of the booming interest in artificial intelligence (AI). However, one famous investor believes that at least one early AI leader won't be a flash in the pan. Billionaire Bill Ackman said he thinks there's at least one stock that will be "a dominant player in AI" for a very long time.
Fumbling the ball?
Ackman, who is CEO of hedge fund Pershing Square Capital Management, spoke on Sept. 28 at the CNBC Delivering Alpha conference. He told CNBC's Scott Wapner that he began scooping up shares of Google parent Alphabet (GOOG +2.66%) (GOOGL +2.81%) earlier this year. The stock now ranks as Pershing Square's second-largest holding.
NASDAQ: GOOGL
Key Data Points
Wapner asked how much of Pershing Square's investment in Alphabet was related to the tech giant's AI efforts. Ackman replied, "It had a lot to do with AI because AI was the reason why the stock was cheap."
However, Wapner noted that some people think that Alphabet fumbled the ball after OpenAI launched its ChatGPT generative AI app. He voiced the naysayers' doubts that Alphabet would be "able to recover the leadership role that it had" in AI in the past.
Ackman, though, argued that Alphabet only "fumbled the PR [public relations]" of its response to ChatGPT with its initial demonstration of Google Bard. He believes this prompted a misconception that Google was "way behind in AI." Ackman predicted in the CNBC interview that Alphabet will instead "be a dominant player in AI for the very, very long term."
Alphabet has multiple AI advantages
Instead of being behind in AI, Ackman is convinced that Alphabet has "many competitive advantages." He called it "one of the greatest businesses in the world" that has invested heavily in AI for years.
He especially likes that Alphabet is integrating AI into all of its products, notably including search. But isn't ChatGPT way ahead of Bard? Not in Ackman's view. He thinks that Bard is now "neck and neck with ChatGPT."
The hedge fund manager sees Alphabet's access to data as a major competitive advantage. Google Search, YouTube, Chrome, Android, Google Mail, Google Docs, and many other apps give Alphabet a massive amount of data for training AI apps that its rivals don't have.
Ackman believes that Google Cloud is a big asset as well. He said in the CNBC interview that "access to the cloud, access to ... you know, the processing power is critical." He also noted that Alphabet has designed its own AI chips.
The innovator's dilemma?
Not everyone agrees with Ackman's take on Alphabet. Some might remember the 1997 book The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, written by the late Clayton Christensen. The premise of Christensen's book was that companies can falter by trying to protect the products that have made them successful from disruptive innovation -- rather than embracing the disruption.
However, I think that Ackman laid out a pretty good case for why Alphabet isn't -- and won't -- succumb to the innovator's dilemma. Actually, the company continues to be one of the top innovative disruptors in AI. The forthcoming highly anticipated release of Google's Gemini AI platform underscores that point.
I agree with Ackman that Alphabet will remain a dominant force in AI for a long time to come. And I think, as he does, that the stock is still one of the best ways for investors to profit from the AI boom.
