Bill Ackman ranks as one of the wealthiest -- and most famous -- hedge fund operators on the planet. His firm, Pershing Square Capital Management, has scored numerous big wins since he founded it in 2004.
While some hedge funds own a large number of stocks, Ackman prefers to focus on a handful of carefully chosen holdings. Several of them have delivered impressive returns in recent years. But which of them would be the best pick for retail investors to consider? Here's the one Ackman stock most likely to turn $200,000 into $1 million over the next 10 years, in my opinion.
Ackman's second-biggest investment
Ackman initiated a new position in Alphabet (GOOG 0.32%) (GOOGL 0.37%) in the first quarter of 2023. At the end of Q1, Pershing Square's stake in the tech giant stood at a little under $1.1 billion. That ranked Alphabet dead least among the hedge fund's holdings.
By the end of the second quarter, the stock had moved up in the rankings somewhat. Pershing Square owned nearly $1.4 billion worth of Alphabet's shares, enough to make it the fund's fourth-largest position.
However, Ackman revealed in an interview at CNBC's Delivering Alpha conference on Sept. 28 that Alphabet is now his second-biggest investment. He stated that his hedge fund continued to buy shares with its price in the $120 range -- not much lower than its current share price.
Why does Ackman like Alphabet so much? He told CNBC's Scott Wapner that he believes the company "will be a dominant player" in artificial intelligence (AI) for a very long time.
How Alphabet could grow by 5x
To be clear, Ackman hasn't claimed that Alphabet could turn $200,000 into $1 million in 10 years. But of all the stocks in Pershing Square's portfolio, I think it has the best chance of growing by five times.
How might Alphabet pull it off? Let's start with the company's biggest moneymaker -- advertising. Between 2020 and 2022, advertising revenue from Google Search, YouTube, and other sources increased at a compound annual growth rate (CAGR) of close to 23.6%. Over the three years between 2017 and 2019, the CAGR was 18.8%. If over the next 10 years, that business achieves a CAGR of 20% -- a middle-of-the-road result based on its history -- Alphabet's advertising revenue would jump by more than 6x.
However, advertising isn't Alphabet's biggest growth driver these days -- Google Cloud is. It's not hard to envision Google Cloud's revenue skyrocketing by 10x over the next 10 years as rapid AI adoption fuels a huge rush to the cloud.
Don't forget Waymo, either. Currently, Alphabet's self-driving car technology unit doesn't contribute much to the company financially. That could change tremendously in the coming years with the robotaxi market potentially poised to explode.
Alphabet could have a few wild cards that work to its benefit as well. I'd put a possible quantum computing breakthrough high on the list. The company has already achieved several key milestones in that promising area.
The main obstacles
Several potential obstacles could prevent Alphabet from becoming a five-bagger over the next 10 years, though. An obvious one would be a prolonged economic downturn. Alphabet's advertising revenue growth would almost certainly taper off in this scenario, likely dragging the stock price down, too.
Some, notably including Bill Gates, predict that the advent of AI-powered personal digital assistants could disrupt Alphabet's search business. Gates stated in May that the right kind of AI assistant could mean that people will "never go to a search site again."
Even if Alphabet avoids an outcome that's quite that dire, it could face stiff competition in its highest-growth businesses. Google Cloud could begin losing market share to other cloud services run by tech giants. Waymo could be left in the dust by other self-driving car companies.
Realistically, the odds are against any given stock turning $200,000 into $1 million in only 10 years. However, Alphabet could fail to achieve this goal and still be a huge winner for investors. Bill Ackman appears to be counting on it.
