Billionaire investor Bill Ackman, who heads Pershing Square Capital Management, became a successful hedge fund manager by investing in the consumer. If you peek at his fund's holdings, most of its investments dabble in the restaurant, retail, and hospitality industries.
But Ackman began pouring money into Alphabet (GOOGL 10.22%) (GOOG 9.96%) last year, building it into his largest holding today. What might have caused Ackman to shift his strategy to the technology sector?
Look no further than artificial intelligence (AI). Alphabet is a fantastic business with AI potential, making it an enticing stock to buy and hold.
Here is more on Bill Ackman's big buy and what it means for you.
Loading up on Alphabet
As I said, Ackman has traditionally steered his investors' money into consumer-driven stocks. He has built the fund up to over $15 billion in assets under management and has famously taken some big bets -- some worked, others didn't.
He began loading up on Alphabet in early 2023. His first-quarter regulatory filings disclosed that he bought an initial position of 2.19 million Class A shares and 8.07 million Class C shares. He purchased more in the third quarter, adding 2.17 million Class A and 1.31 million Class C shares. The two classes now represent 17.2% of the fund's portfolio, surpassing his former favorite, casual Mexican restaurant chain Chipotle Mexican Grill.
In a November interview, Ackman said that he believes Alphabet's AI potential hadn't been adequately factored into the stock's valuation, which played a significant role in his decision to invest. Today, shares are at their all-time highs, so he is already sitting pretty.
What your money buys you today
The most crucial question is whether the stock is still attractive to investors. The good news is that Alphabet is churning out record revenue and free cash flow despite a soft advertising market over the past 18 months. The company makes most of its money from selling ads to people visiting Google Search and YouTube, the world's two most-visited sites by a considerable margin.
Ackman looks to have timed his purchases well. The stock bottomed at a price-to-earnings ratio of 15, which has since floated higher to over 22:
GOOGL revenue (TTM) data by YCharts; TTM = trailing 12 months.
Given the chance, you would fire up the time machine and buy shares at their lows. Fortunately, Alphabet still looks like a good buy. Analysts believe earnings can compound at over 17% over the long term. That's still a solid price/earnings-to-growth ratio of 1.3, indicating shares are attractive, considering their expected earnings growth.
AI can create value in two crucial areas
AI arguably plays the most important role in Alphabet's future. Investors have seen tech companies roll out AI chatbots like ChatGPT over the past year, but the real impact could be felt elsewhere. First, AI could become a significant advantage for digital advertising giants like Alphabet.
The company is inserting generative AI into the user search experience. And AI could improve ad efficiency, helping customers target their audience better.
Rival company Meta Platforms has also leaned into AI tools to help strengthen its core ad business. Using AI to improve search results or match viewers with the ideal YouTube ads will help Alphabet charge more if its ads yield better results.
Alphabet, a leading cloud platform along with Amazon and Microsoft, is tying in complementary products like cybersecurity and developer tools so that companies can build AI applications on Google Cloud's framework.
It will take some time to see how these innovations -- some already in motion -- will affect Alphabet's overall growth. Pershing Square's future disclosures will reveal how far into the future Ackman thinks. But that aside, Alphabet remains a tech powerhouse with deep pockets, making the stock a no-brainer choice that investors can snap up when shares are reasonably priced like they are now.
