When you look at the stock portfolios of most billionaire hedge fund managers, you'll find plenty of the Magnificent Seven stocks, as well as exposure to some of the most promising AI stocks. But that isn't the case in Bill Ackman's Pershing Square hedge fund's portfolio. In fact, despite having about $10 billion invested in the stock market, there are only seven different stocks in its latest SEC filings, and only one is a Magnificent Seven tech stock -- Google parent company Alphabet (GOOGL 0.37%) (GOOG 0.32%)
As of the latest information, Pershing Square owns more than 13.7 million shares of Alphabet, with a total market value of $1.93 billion. This accounts for about 19% of Pershing's portfolio and makes it the hedge fund's largest investment.
Unlike some of the other investments in Ackman's portfolio, he hasn't held Alphabet shares long, adding shares of both Class A and Class C shares to the portfolio in early 2023. Here's a closer look at Alphabet's business and why Ackman might be such a fan.
Alphabet in a nutshell
Alphabet is best known for its Google subsidiary, which most people know for the Google search engine, as well as other tools like Gmail, Maps, Chrome, and Android. These, and a few other parts of the business, such as YouTube, make up the Google Services segment, which primarily makes its money by selling advertising on its various platforms.
The lesser-known part of the business (by most investors) is Google Cloud, the cloud services business. It's a competitor to Amazon (AMZN 0.81%) Web Services and Microsoft's (MSFT 2.22%) Azure, and is the number three cloud services provider, with a smaller share than either of those.
There are a few other components of Alphabet's business, but the two Google segments produce virtually all of its revenue.
A tremendous combination of profitability and growth potential
First off, Alphabet is a tremendously profitable business. It generated a net margin of 24% over the past four quarters and produced more than $88 billion in operating income in 2023 alone. The company also has about $111 billion in cash and short-term investments on its balance sheet, and the combination of cash reserves and massive cash flow gives it excellent financial flexibility.
Second, Alphabet has a rare combination of a dominant business and massive growth potential. Many people reading this couldn't say what the number two search engine is without looking it up, and some of the other Google platforms are similarly dominant.
Google's ad revenue should grow significantly over time, especially as it leverages AI and other technologies to target advertisements at the right consumers and businesses more effectively. The Google Cloud side of the company in particular could have incredible growth potential. The global cloud computing market is expected to roughly quadruple in size by 2030, and Google Cloud could be a big beneficiary. In the most recent quarter, Google Cloud revenue grew by 26% year over year, and this level of growth could continue for many years to come.
Looking ahead
Alphabet isn't exactly a cheap stock, trading for 28 times forward earnings estimates. But you get what you pay for in this case. Alphabet has the trifecta -- profitability, dominance, and growth potential -- and considering where it stands on all three of those, it looks attractively valued.
