Billionaire Bill Ackman manages the hedge fund Pershing Square Capital Management. He achieved a total return of 212% during the five-year period that ended in February 2024, easily outperforming the S&P 500, which increased 99% during the same period. That makes him a good case study for aspiring investors.
With that in mind, Ackman had 37% of his $10.4 billion portfolio split between two companies as of the December quarter. Alphabet (GOOGL +1.71%) (GOOG +1.99%) accounted for 19% of his invested assets, and Chipotle Mexican Grill (CMG +2.14%) accounted for 18%. That position sizing screams high conviction.
Here's what investors should know about these two brilliantly successful companies.
NASDAQ: GOOGL
Key Data Points
1. Alphabet
Alphabet reported solid results in the fourth quarter, beating estimates on the top and bottom lines. Total revenue increased 13% to $86.3 billion on particularly strong sales growth in the cloud computing segment. Meanwhile, GAAP net income soared 52% to $20.7 billion as cost control efforts led to a 300-basis-point expansion in operating margin. Investors can expect similar revenue growth in the coming quarters, though earnings growth will undoubtedly slow.
Alphabet subsidiary Google has a durable competitive advantage in its ability to source data from across the internet. Specifically, the company owns 15 products that serve at least 500 million users, and six products that serve more than 2 billion users. That includes internet search engine Google Search, streaming platform YouTube, the Android mobile operating system, and the Chrome web browser.
The upshot is that Google dominates the digital advertising market because it has a deep understanding of consumer behavior that media buyers find valuable. The company accounted for 39% of digital ad spending last year, according to Statista. Google is working to strengthen its position by infusing its ad tech ecosystem with new artificial intelligence (AI) capabilities, including the recent addition of generative AI capabilities to Google Search.
Meanwhile, Alphabet has steadily gained share in cloud computing due to investments in product development and go-to-market capabilities. Google Cloud Platform accounted for 11% of cloud infrastructure and platform services revenue in the fourth quarter, up one percentage point from the prior year. Google still trails Amazon and Microsoft by a wide margin, but the recent release of Gemini could help the company gain more market share.
Gemini is a machine learning model that can outperform GPT-4 (the engine behind ChatGPT Plus) across a range of benchmarks, according to the company. Gemini lets Google Cloud customers build AI applications, such as conversational chatbots and intelligence search agents. Gemini also integrates with Google Workspace applications to automate tasks like drafting content in Google Docs, synthesizing data in Google Sheets, and generating images in Google Slides.
Going forward, Wall Street expects Alphabet to grow sales by 10% annually over the next five years, but that estimate leaves upside if the company merely maintains its market share in advertising and cloud computing. I say that because digital ad spending is expected to grow at 15% annually through 2030, and cloud computing revenue is expected to grow at 14% annually during the same period.
However, the current valuation of 6.4 times sales look reasonable even if the Wall Street consensus is correct. Patient investors should feel comfortable buying this growth stock today, but I would be much more conservative on position sizing than Bill Ackman.
NYSE: CMG
Key Data Points
2. Chipotle Mexican Grill
Chipotle looked strong in the fourth quarter despite a challenging environment for many peers in the restaurant industry. Revenue for the fast-casual restaurant chain increased 15% to $2.5 billion, operating margin expanded 80 basis points to 14.4%, and non-GAAP net income soared 25% to $10.36 per diluted share. The driving force behind that success was strong same-store sales growth of 8.4% driven by pricing power and a 7.4% increase in foot traffic.
Those numbers are truly impressive in context. The average restaurant saw same-store sales increase just 1.1% in December, while customer traffic actually declined 1.7%, according to the National Restaurant Association. That means Chipotle brought more people in the door while the average competitor lost business, something the company does on a regular basis. That is a testament to the brand authority Chipotle has cultivated through its "food with integrity" strategy.
To elaborate, Chipotle sources only responsibly raised meats (no hormones or antibiotics) and organically grown produce, and it uses only real ingredients (no preservatives or artificial flavors). The company is also committed to fresh ingredients, which means no freezers, no can openers, and no microwaves, according to CEO Brian Niccol. That strategy has helped Chipotle separate itself from other quick-service restaurants.
Unfortunately, not every brilliant company also qualifies as a great investment. Wall Street expects Chipotle to grow earnings per share at 20% annually over the next five years. That consensus estimate makes its current valuation of 65 times earnings look rather expensive. To be fair, investors that want a piece of this company should be prepared to pay a premium, but I would personally wait for a cheaper entry point before purchasing shares.
