Nvidia (NVDA -0.22%) is arguably the world's most popular artificial intelligence (AI) stock, as evidenced by its 215% gain in the past year alone. It's not a claim without merit, because the company's revenue more than doubled in fiscal 2024 (which ended Jan. 28) on the back of its industry-leading AI data center chips.
But if investors want to know where the AI industry is headed next, it can be helpful to know where billionaires are putting their money. Bill Ackman, for example, manages a $10 billion stock portfolio for his hedge fund, Pershing Square Capital Management, and he doesn't own Nvidia at all.
Instead, Ackman owns a $1.9 billion position in Google parent Alphabet (GOOG -3.11%) (GOOGL -3.16%). Not only has he made solid gains on that investment already, but the stock is also still cheap and could be poised for further upside thanks to the company's AI initiatives.
Here's why it's not too late for investors to follow Ackman's lead.
Image source: Alphabet.
Microsoft created an opportunity for Ackman to buy Alphabet
It's no coincidence Bill Ackman bought Alphabet stock in the first quarter of 2023 when Microsoft (MSFT -1.38%) announced its $10 billion investment in leading AI startup OpenAI. Microsoft quickly integrated OpenAI's ChatGPT technology into its Bing search engine, in an attempt to disrupt Google's 91% market share in the internet search industry.
Traditional search engines like Google typically make the user sift through web pages for the information they need, whereas Bing's new chatbot interface can instantly provide a direct answer to almost any question. It's a far more convenient experience. Alphabet stock plunged because investors feared the company fell way behind Microsoft on the AI front, but Ackman viewed that as a buying opportunity.
In a recent interview with David Rubenstein, Ackman said Alphabet's valuation had fallen so much that he was getting a great deal on the company's existing businesses, like search and YouTube, while getting its AI initiatives basically for free.
It's interesting to note that Ackman felt Alphabet's AI technology was neck-and-neck with OpenAI's when he made the investment, even though Alphabet hadn't launched its own AI chatbot yet.
Alphabet's Gemini now outperforms OpenAI's latest GPT-4 models
Shortly after Microsoft announced its OpenAI investment, Alphabet reminded investors it had been working on AI for years. After all, Google acquired AI startup DeepMind way back in 2014. That's why it took only a few months to launch Google Bard, a chatbot designed to compete directly with ChatGPT.
The quality of a generative AI application comes down to the quality of the developer's data, and since Google has been the window to the internet for decades, it arguably has more useful information with which to build AI applications than any other company.
Bard paved the way for Alphabet's latest and greatest family of AI models called Gemini, which were launched in December. According to Alphabet, Gemini outperforms OpenAI's most advanced GPT-4 models across most multimodal benchmarks. In other words, it's capable of interpreting and generating text content, images, videos, and computer code more accurately.
Alphabet announced the release of Gemini 1.5, which is even more advanced, in February. The company says it's far better at "in-context learning," meaning it can learn new skills from users' prompts without needing additional fine-tuning from developers. In one test, Alphabet gave Gemini 1.5 a grammar manual for a rare language called Kalamang -- which has fewer than 200 speakers worldwide -- and it could translate it at a similar level to human subjects who used the same learning material.
Gemini is now available as a standalone chatbot, but its technology is also woven into the traditional Google Search engine to feed users text-based responses in their search results. That reduces the amount of time users have to spend clicking through to third-party web pages for the information they need, striking a balance between traditional search and the chatbot experience.
Ackman is sitting on big gains, but Alphabet stock can still go higher
Ackman bought the bulk of Pershing Square's Alphabet position in the first quarter of 2023, at an estimated average price of $96.56. That implies he's sitting on a 60% gain based on the stock's current price of $154.85. Ackman added to his holdings in the second and third quarters of 2023, and he's sitting on a profit on those positions, too. But it isn't too late for investors to follow his lead, because the stock is still relatively cheap.
Alphabet generated a record $307.4 billion in revenue in 2023, with $5.80 in earnings per share (that is, profit). The latter places Alphabet stock at a price-to-earnings (P/E) ratio of 26.7. That means Alphabet is the second-cheapest stock among the six U.S. tech giants valued at $1 trillion or more:
The advertising dollars generated by Google Search still account for most of Alphabet's revenue. However, Google Cloud is the company's fastest-growing segment thanks to its growing portfolio of AI services. Businesses and developers can access the latest data center infrastructure and ready-made large language models, including Gemini, on Google Cloud to build their own AI applications.
Alphabet is also weaving Gemini into its other products, such as Google Docs and Gmail, offering a productivity boost to customers who can now use AI to rapidly craft content in those applications. Longer-term, Alphabet is reportedly negotiating with Apple to make Gemini the default AI chatbot on that company's devices, including the iPhone. Details are scarce, but it could be an incredible opportunity, considering Apple has an installed base of more than 2.2 billion devices worldwide.
I think Ackman made a spectacular bet on Alphabet, and his $1.9 billion position is likely to continue to grow in value.
