Thanks to disclosure requirements by the Securities and Exchange Commission (SEC), individual investors can keep tabs on the trading moves of prominent investors. Bill Ackman, a billionaire hedge fund manager of Pershing Square Capital, is someone who might be worth following, given his impressive track record since his firm's inception in 2004.
As of the end of 2023, Ackman's portfolio had 18.5% of its assets combined in Alphabet's (GOOG +1.10%) (GOOGL +1.31%) Class A and Class C shares. This makes the "Magnificent Seven" stock his largest position.
I view this as a huge vote of confidence in the tech titan. The Magnificent Seven are some of the most dominant, innovative, and disruptive companies that we've ever seen, and they have rewarded investors in the last decade. Yet Ackman decided to take a sizable stake in the digital ad juggernaut.
Let's figure out what factors make this hedge fund manager bullish on Alphabet's prospects. Then you can decide for yourself if shares are worth buying.
A clear investment thesis
In his firm's June 2023 investor letter, Bill Ackman said that Google (Alphabet's main subsidiary) is "one of the world's greatest businesses." There are numerous reasons he holds this view.
For starters, Google Search, which generated 57% of company revenue in 2023, benefits from high barriers to entry and powerful network effects. It has a monopoly position in the global search industry, with over 91% market share. Add this wide reach to YouTube's dominance, and it's no surprise that Alphabet is the leader when it comes to worldwide digital advertising.
Ackman is confident that there is still a lot of room for the business to grow revenue close to double digits going forward. He believes a lot more marketing spending will shift from offline to online. And Alphabet will be the prime beneficiary of this trend.
We can't overlook Google Cloud, which saw its revenue jump 26% last year. The fast-growing division has now reported four straight quarters of positive operating income.
NASDAQ: GOOGL
Key Data Points
Like many businesses in the tech sector, Alphabet has prioritized trying to drive efficiencies following huge gains during the pandemic. Sizable layoffs and ongoing cost cuts should lead to improving profit margins over time, according to Ackman.
He also discussed how Alphabet has been a leader in artificial intelligence (AI) long before the current boom took hold of the economy. The company has products and services used by billions of people, which allows it to amass massive amounts of data that can lead to constant improvements and continuous feature introductions.
Alphabet's financial strength is another attractive quality. A net cash position of $98 billion, copious amounts of free cash flow, and consistent share buybacks were other factors that caught Ackman's eye.
Should you buy Alphabet stock?
The reason that Pershing Square purchased shares of Alphabet in the first half of 2023 was because of the attractive valuation. The hedge fund bought shares at a forward price-to-earnings (P/E) ratio of 16, which was an absolute bargain.
Investors were worried that the launch of OpenAI's ChatGPT, and its integration with Microsoft's Bing search engine, would be the beginning of the end for Alphabet. The thinking was that Google Search would no longer be the dominant force in digital advertising due to a possible change in how people would seek out information. In hindsight, these fears appear to be overblown.
Even after the stock's 57% rally in the last 12 months, I still think the situation is compelling for prospective investors. Shares trade at a forward P/E multiple of 21.3 right now. That's far from being expensive.
To be clear, it's best not to blindly follow other investors, no matter how accomplished and well regarded they are. Always try to think independently and understand companies for yourself before buying. If you feel confident about Alphabet's prospects, it's a good idea to add the stock to your portfolio.
