Every quarter, investors get a peek at what some of the world's top investors are holding in their portfolios. Billionaire Bill Ackman, who runs hedge fund Pershing Square Capital Management, is on this list of closely watched professionals. His track record is strong, as he follows an investment philosophy that mimics the great Warren Buffett.
As of Sept. 30, Ackman's hedge fund had nearly 19% of its $14.6 billion in assets under management in a single company, split between two classes of shares. This made it the third-largest holding. There's no doubt that this business is a top artificial intelligence (AI) stock.
Continue reading to learn more about this company before assessing whether or not it's a smart buy for your own portfolio.
Image source: Alphabet.
Alphabet has broad exposure to AI
Companies such as Nvidia and OpenAI get a lot of the attention these days, as they have found remarkable success in the ongoing AI boom. Investor excitement is justified. However, investors shouldn't forget about Alphabet's (GOOGL +3.02%) (GOOG +2.82%) position in the industry.
This business is a leading AI investment opportunity. That's because it's involved in seemingly all aspects related to this new technology. Alphabet's Google DeepMind is a top AI research lab, pushing the envelope when it comes to leveraging AI to solve different problems.
Digging a bit deeper, it's noteworthy that Alphabet is involved in hardware development. It builds its own chips, such as tensor processing units (TPUs), to power AI models.
On the platform level, Alphabet has Google Cloud, which posted stellar 34% year-over-year revenue growth in the third quarter (ended Sept. 30). This division, which reported an operating margin of 24%, has $155 billion in customer backlogs, supported by huge demand for its AI products and services.
Moving further along, Alphabet uses AI to help its digital ad customers be more creative, efficient, and effective with their campaigns. For instance, AI Max in Search "helps advertisers discover new customers at the exact moment they need their product or service," said Chief Business Officer Philipp Schindler.
The business operates from a position of financial strength
Besides having its hands in all areas of AI, what makes Alphabet stand out even more is its financial position. It continues to operate from a position of strength, which allows it to go all-in on AI. Alphabet looks like it's always playing offense, with management being able to take advantage of any opportunities that it sees.
Alphabet reported $35 billion in net income in the third quarter, which was up 33% compared to Q3 2024. This helped it produce an impressive $24.5 billion in free cash flow during the three-month period. Being in such a solid financial shape gives the leadership team confidence to the point that it now plans to spend $91 billion to $93 billion in capital expenditures (capex) in 2025. This will mainly go toward AI-related infrastructure expansion.
NASDAQ: GOOGL
Key Data Points
Alphabet shares still trade at a reasonable valuation
Bill Ackman and Pershing Square first took a stake in Alphabet in the first half of 2023. According to the hedge fund's shareholder letter, the tech stock was trading at a forward price-to-earnings (P/E) ratio of 16 when Ackman bought in. But even after the share price's incredible performance since then, the valuation remains reasonable.
The stock can be purchased at a forward P/E multiple of 25 right now. That looks like a good deal for investors who are interested in this top AI stock.
There's no doubt that Alphabet is one of the greatest businesses in the world. In addition to dominating in the AI space, the company owns and operates some of the most popular and widely adopted internet properties out there. It benefits from a tremendous ability to collect and leverage data. Plus, it has powerful network effects.
Investors who decide to buy shares today should see adequate returns over the next five years and beyond.
