Some investors firmly believe in building highly diversified portfolios. Not Bill Ackman. His Pershing Square Capital Management hedge fund owns stakes in only nine companies. However, this approach has worked out pretty well for Ackman through the years: His net worth totals $9.1 billion.
Over 20% of Ackman's portfolio is invested in one artificial intelligence (AI) stock. And Wall Street thinks the stock will soar over 20% within the next 12 months.
Ackman's top AI stock
What is Ackman's favorite AI stock these days? It's Google parent Alphabet (GOOG 2.98%) (GOOGL 2.89%). His Pershing Square hedge fund owns class A and class C shares of the tech giant worth roughly $2.1 billion as of June 30, 2024.
Ackman initiated a position in Alphabet in the first quarter of 2023. OpenAI had launched ChatGPT to rousing success only a few months earlier. Alphabet's subsequent introduction of its generative AI app Bard didn't go very well.
With Alphabet's share price sinking on the bumbling Bard launch, Ackman began aggressively buying the stock. He noted in a CNBC interview later in 2023 that Alphabet was integrating AI throughout its products and designing its own AI chips. The billionaire investor also thought the company had a competitive advantage with its access to data to use in training AI models.
Sure, Ackman reduced Pershing Square's stake in Alphabet in the second quarter of 2024 somewhat. It's still the hedge fund's largest position, though, with the class A and class C shares combined. Alphabet has also been a huge winner for Ackman.
Analysts' bullish views on Alphabet
Wall Street believes Alphabet can continue its winning ways. The average 12-month price target for the stock is $200.67. That reflects an upside potential of 21.6%. The most pessimistic analyst surveyed by LSEG thinks that Alphabet's shares will rise over the next 12 months.
Thirteen of the 43 analysts surveyed by LSEG in October rate Alphabet as a "strong buy." Another 256 recommend the stock as a "buy." The remaining five analysts view Alphabet as a "hold." None think investors should sell the stock.
BMO Capital's recent reiteration of an "outperform" rating (the equivalent of a "buy" recommendation) for Alphabet highlights why many on Wall Street like the stock. The firm wrote to investors that AI, especially generative AI, should provide a significant growth opportunity for the company's Google Cloud unit.
In the second quarter of 2024, Google Cloud revenue soared 29% to $10.3 billion. Its operating income nearly tripled year over year to $1.17 billion. Alphabet CEO Sundar Pichai said in the Q2 earnings call that his company's generative AI solutions "have already generated billions in revenues and are being used by more than 2 million developers."
Is Wall Street right about Alphabet?
Alphabet faces some challenges. The company has wrangled with regulators multiple times through the years. It's now doing so again with a federal judge ruling that Google unfairly stifled competition in the search engine business. Google also is embroiled in another antitrust lawsuit alleging illegal monopolization of the digital advertising industry.
Some concerns remain that generative AI could eventually be a Google killer. Research firm eMarketer predicts Google's search ad market share in the U.S. will fall below 50% for the first time in a decade due to increased competition from TikTok and AI start-ups such as Perplexity.
Despite these issues, I won't be surprised if Wall Street is right that Alphabet stock can rise another 20% or more over the next 12 months. I wouldn't write off Alphabet's long-term prospects, either. As Ackman told CNBC last year, "[Alphabet] will be a dominant player in AI for the very, very long term." He hasn't amassed a multibillion-dollar fortune by being wrong about his big bets.
