Warren Buffett took control of Berkshire Hathaway in 1965 and turned the textile mill into a holding company. He promptly diversified into insurance to create a steady stream of investable cash in the form of premium payments. Buffett used that capital to buy stocks and acquire businesses, turning Berkshire into a trillion-dollar company in the process.
Billionaire Bill Ackman wants to recreate that success with Howard Hughes Holdings. His hedge fund had $1.4 billion invested in the stock as of March, and Ackman in added another $900 million in May. He plans to use Howard Hughes as a vehicle to create a "modern-day Berkshire Hathaway" by purchasing controlling interests in quality companies.
Ackman is already highly visible in the financial world. His hedge fund, Pershing Square Capital, beat the S&P 500 (^GSPC -0.35%) by nearly 30 percentage points over the last five years. So Ackman could become the next Buffett if he turns Howard Hughes into a diversified Berkshire-like business.
Meanwhile, Ackman has 33% of his hedge fund invested in two brilliant stocks: 19% in Uber Technologies (UBER 0.85%) and 14% in Google-parent Alphabet (GOOGL 0.10%) (GOOG 0.07%). That both stocks account for such large percentages of the total portfolio shows conviction. Here's what investors should know.
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Uber Technologies: 19% of Bill Ackman's portfolio
Uber is a leader in mobility and food delivery services. It operates the largest ride-sharing platform and second largest restaurant food delivery platform in the U.S. in terms of sales. It also ranks as the largest ride-sharing platform in nine other countries, and the largest food-delivery platform in eight countries. That scale affords Uber important advantages.
First, Uber can cross-promote its own products because it provides mobility and delivery services through a single mobile app, and the company is executing: 30% of first delivery trips come from mobility users, and 22% of first mobility trips come from delivery users. Second, Uber benefits from a strong network effect, meaning its platform becomes more valuable to consumers with each new driver (and vice versa).
Third, Uber collects a tremendous amount of data because of its scale. It uses that information to continuously improve its ability to dispatch drivers, route rides, and set prices. That data has also given rise to a booming advertising business. Uber can use what it knows about consumer delivery habits to help brands target ad campaigns on its mobile app.
Fourth, Uber is uniquely positioned to help autonomous driving companies bring robotaxis to market because it already operates the largest ride-sharing platform in the world. CEO Dara Khosrowshahi says autonomous driving technology will unlock a trillion-dollar opportunity in the U.S. alone, and Uber is already making moves to capitalize.
It recently partnered with WeRide to bring robotaxis to Abu Dhabi and soon Dubai, and they will expand to 15 new cities (including some in Europe) during the next five years. Uber has also partnered with Alphabet's Waymo in Phoenix, Austin, and Atlanta. Waymo robotaxis just launched in Austin and strong initial results could lead to a further collaboration with Uber in the U.S.
Uber estimates adjusted EBITDA will increase 32% in the second quarter, and management has guided for similar results through 2026. That means adjusted earnings should increase at roughly the same pace, which makes the current valuation of 16 times earnings look very reasonable. Patient investors should feel comfortable buying a position in this stock today.
Alphabet: 14% of Bill Ackman's portfolio
Alphabet is the largest ad tech company in the world because of its ability engage internet users and source data through platforms like Google Search and YouTube. The search market is undoubtedly shifting toward artificial intelligence (AI) tools, and competitors like Perplexity and ChatGPT are a potential threat. But Alphabet is leaning into that opportunity with its own generative AI overviews.
Alphabet also runs the third largest public cloud in terms of infrastructure and platform services (CIPS). Google Cloud accounted for 12% of total CIPS spending in the first quarter, up a percentage point from the same quarter last year but flat sequentially. As a recognized leader in AI infrastructure and large language models, the company could keep gaining market share as AI demand increases.
Importantly, Alphabet is currently involved in two antitrust lawsuits brought by the Justice Department that could lead to a breakup, meaning the company may have to sell certain assets. Judges have already ruled against Alphabet in both lawsuits and the cases have now moved to the remediation phase. Most analysts think the courts will stop short of breaking up the business, but investors should be aware of the risk.
Wall Street estimates Alphabet's earnings will increase at 7% annually through 2026. That makes the current valuation of 18 times earnings look reasonable, especially because the company beat the consensus earnings estimate by an average of 14% during the last six quarters and similar outperformance is plausible in future quarters.
The ad tech and cloud services markets are projected to grow at 14% annually and 20% annually, respectively, through 2030. Alphabet is losing market share in digital advertising, but YouTube and Google Search are still two of the most engaging web properties. And the company is gaining share in cloud services. If it maintains that momentum, earnings could grow faster than expected.
