Last week, renowned hedge fund manager Bill Ackman spoke at length about a new position in his portfolio. As it turns out, Silicon Valley investors are not the only ones looking to capitalize on the rising popularity of artificial intelligence (AI).
Ackman recently bought more Alphabet stock (GOOG 1.68%) (GOOGL 1.66%), a position worth well over $1 billion in his portfolio. This was an interesting move for Ackman. Why? Well, because not all prominent investors are certain that Alphabet is building an AI moat.
Let's dig into what Ackman sees in Alphabet's potential versus some contradicting views. More importantly, after a look at Alphabet's roadmap, I'll benchmark the stock against some AI leaders to help determine whether the stock looks attractive, as Ackman suggests.
A tale of two chatbots
You may recall that Microsoft invested billions in OpenAI, the parent company of ChatGPT. After its investment, Microsoft began integrating ChatGPT into several areas of its business earlier this year. Perhaps most notably, the company rolled out an enhanced, AI-powered version of its search tool, Bing. Many viewed this as a direct shot at Alphabet and its dominance in online search via Google.
Alphabet responded to this move quickly, but the initial results were not exactly pretty. Alphabet addressed ChatGPT's rising popularity by publicly demonstrating some of its own AI tools. In particular, the company gave the public a preview of its ChatGPT rival, Google Bard. The result? An unimpressive display of Alphabet's AI progress riddled with inaccurate answers from the Bard language model.
Unsurprisingly, Alphabet stock was torched once investors learned of the embarrassing hiccup. And one prominent investor, in particular, has not been shy about speaking about his doubtful outlook on Alphabet.
Image Source: Getty Images
Nothing like sparring on social media
Brad Gerstner of Altimeter Capital has been speaking for months about why he sold Alphabet shares earlier this year. Most recently, the venture capitalist took to social media after Ackman's panel discussion with CNBC.
Gerstner posted on X (formerly Twitter) to defend his stance and address Ackman's investment thesis.
2/ Bill is right-$GOOG is still investable and cheap-and will also have some offsetting benefits due to AI cloud-but the discount one has to apply to their continuing dominance / tax on the internet / consumer search has gone up for the first time in 20 years. @friedberg
-- Brad Gerstner (@altcap) Sept. 29, 2023
Essentially, Gerstner argues that Alphabet has a monopoly on search. However, what he is trying to convey is that, given the myriad AI-powered tools and services available, it is unlikely that Alphabet will have the same moat on AI as it does on consumer search. While he may be correct, it does not appear that Ackman necessarily cares about this particular dilemma. Rather, he seems to be thinking about the bigger picture.
Ackman believes that Alphabet's ecosystem and the incredible amount of data the company accesses serve as a competitive advantage. Furthermore, by leveraging data across its large suite of products, Alphabet can train its AI in an "integrated fashion." Lastly, Ackman briefly touched on Alphabet designing its own chips, something another one of its Big Tech cohorts is doing as well.
One thing I would encourage investors to look at is Gerstner's follow-up post, in which he acknowledges that Alphabet's cloud will benefit from AI. Although Amazon and Microsoft still dominate in cloud infrastructure, Alphabet is catching up quickly, thanks in large part to AI. So, while I understand Gerstner's view that Alphabet is unlikely to have a monopoly on AI, in a way, he counters his own argument and supports Ackman's investment thesis by calling the stock "cheap" and describing how the company can use AI beyond search.
Should you follow Ackman's lead?
NASDAQ: GOOG
Key Data Points
Toward the end of the interview, Ackman calls Alphabet a "very mispriced stock." Let's use some valuation techniques to assess this stance.
Data source: YCharts
The chart above shows the price-to-earnings (P/E) ratios for Microsoft, Amazon, Nvidia, and Alphabet. Investors can see that Alphabet is trading at more than 28 times earnings, the lowest of this group. This is actually pretty surprising, considering Amazon, in particular, was burning free cash flow for several quarters and only returned to inflows recently. Stated another way, although it's encouraging that Amazon is free-cash-flow positive, there may be too much of a premium placed on the stock relative to its peers.
For its part, Alphabet has returned to growth in its advertising business as it competes fiercely with other social media platforms such as TikTok. Moreover, the company's cloud segment is accelerating its top line while also reaching consistent profitability.
At the end of the day, AI is clearly in its early innings, and it's likely too soon to call definite winners and losers. But as it stands now, Alphabet's various businesses, which support both consumers and enterprises, make it a compelling choice among AI investments. Furthermore, the company's P/E relative to its peers certainly does make it look cheap.
