Hedge funds employ all sorts of techniques to help craft their investment strategies. For example, some firms hold hundreds or even thousands of stocks, providing them with a high degree of diversification across industry sectors and company sizes.
Billionaire hedge fund manager Bill Ackman, CEO of Pershing Square Capital Management takes a different approach. According to the firm's most recent 13F filing, the fund has positions in just 10 public companies. And while many on Wall Street can't seem to get enough of artificial intelligence (AI) stocks, Ackman owns only one pure-play AI name: Alphabet (GOOGL +0.41%).
Let's dig into Ackman's bull thesis around Alphabet and assess why the stock looks like a great buy right now.
NASDAQ: GOOGL
Key Data Points
The AI narrative for Alphabet is compelling
According to Pershing Square's annual investor presentation, the firm believes that Alphabet holds an "underappreciated leadership" position in the AI realm. I agree with this sentiment. While two of the company's largest properties include Internet search tool Google and video-sharing platform YouTube, Alphabet is a highly diversified operation.
Beyond traditional Internet platforms, Alphabet also has a thriving cloud computing business called Google Cloud Platform (GCP). In addition, the company offers a host of workplace productivity tools and is even exploring the autonomous driving market through its subsidiary, Waymo.
Image Source: Getty Images.
Alphabet's growth is impressive across the board
In 2024, Alphabet's revenue from advertising came in at $264.6 billion -- an increase of 11% year over year. Of note, advertising sales accelerated across both Google and YouTube -- signaling demand to advertise on these platforms remains strong despite emerging alternative platforms.
Furthermore, revenue from GCP rose by 30% last year -- reaching a total of $43.2 billion. What's even better is that GCP's operating profit of $6.1 billion was more than triple compared to its profitability levels in 2023.
GOOGL Revenue (Quarterly) data by YCharts
While revenue growth is nice to see, I'm particularly encouraged by Alphabet's ability to consistently widen its profit margins and accelerate free cash flow and earnings. To me, this underscores the company's ability to reinvest in research and development (R&D) and continue building out its AI roadmap -- which the company can further use to stitch together its various businesses.
Alphabet stock is trading for a bargain right now
When it comes to advertising, Alphabet faces fierce competition from Meta Platforms and viral social media app TikTok. Moreover, Amazon and Microsoft remain the top two players in the cloud computing arena.
On the search side of the house, the rise of large language models (LLMs) such as ChatGPT or Claude are giving credence to the idea that using Google may be an archaic, antiquated way of looking for an answer to your questions in an efficient way. I think these dynamics are dampening investors' views over Alphabet's growth prospects.
This sentiment is reflected in the chart below, as Alphabet's forward price-to-earnings (P/E) ratio of 18.7 is below the company's five-year average. I think this discounted valuation signals a mixed opinion over Alphabet and its ability to compete at a high level in the AI arena over the next several years.
GOOGL PE Ratio (Forward) data by YCharts
Even with the rising popularity of new search tools, Google and YouTube are consistently the two most visited websites in the world, according to data tracked by Similarweb and Semrush. Alphabet's ability to command such a large user base gives the company an advantage when attracting digital advertisers -- as underscored in the financial results explored above.
In addition, GCP's growth rate of 30% is more than double that of Alphabet's entire business. As AI workloads continue to scale for businesses of all sizes, I see cloud infrastructure swiftly becoming a major source of growth for Alphabet -- perhaps even becoming a more important part of the business than digital advertising in the long run. I think this positions Alphabet well to continue competing against AWS and Azure.
At the end of the day, I think investors are largely buying into a narrative that Alphabet is facing competition on all fronts and can't keep up. But to me, the company's improving financial profile across both sales and profits tells a different story.
I think Alphabet stock is trading for a bargain right now, and growth investors may want to consider scooping up shares and preparing to hold on for the long haul.
