Prosperous investor Bill Ackman Allocates 15% of His Investment Fund to This Noteworthy Share: Is It Wise to Purchase Now?
Small-time investors can discover promising investment prospects by examining the moves of significant players in the market. Regulations mandate large investment firms to reveal their holdings every quarter, offering potential investors a wealth of information about potential stocks to buy.
A prominent hedge fund manager generating interest is William Ackman, famous for his strategic bets as the CEO of Pershing Square Capital Management. One specific company constitutes a significant portion of the fund's assets.
As of Sept. 30, Ackman held approximately 15% of the fund's assets in a single outstanding stock through two types of shares. Should this encourage you to invest?
Optimistic about a digital giant
In the early stages of 2023, Ackman and Pershing Square started purchasing shares in Alphabet (GOOGL 0.32%) (GOOG 0.31%). They entered into a position when the tech powerhouse's shares possessed an appealing valuation, represented by a low forward price-to-earnings (P/E) ratio of around 16. Ackman considered this a fair price for what he perceived as a globally renowned enterprise.
He provided a multiplicity of reasons that supported this investment decision.
Alphabet derives benefits from the expanding digital advertising sector, owing to its stronghold in the market. Google Search, the firm's market-dominating search engine, boasts an unrivaled market share. Alongside YouTube, Alphabet has another platform to sell digital advertising. Ackman anticipates an escalation in funds shifting from traditional advertising avenues such as television and print to the advantage of Alphabet.
Cloud computing serves as one of the vital growth drivers for Alphabet. With businesses of all scales recognizing the need for enhanced off-site IT capabilities, Google Cloud offers another lucrative secular trend. This segment reported a stunning 35% year-over-year revenue growth and a 17% operating margin during the previous quarter. Ackman would not be surprised to observe the margin moving toward the margin displayed by Amazon Web Services, which currently surpasses 38%.
Alphabet emerges as one of the financially stable companies on the planet. By Sept. 30, it showcased a net cash position of $80.9 billion and generated $17.6 billion of free cash flow during the three-month period. The robust financial health of the firm empowers its management to actively repurchase outstanding shares.
When it comes to artificial intelligence, only a handful of enterprises are in a more advantageous position than Alphabet. Upon the release of ChatGPT two years ago, market participants were perturbed that it could mark the downfall of Google Search. However, Pershing Square's June 2023 letter stated, "We believe that these concerns underestimate Google's structural leadership position in AI for several key reasons."
Ackman and his team believe that Alphabet's renowned internet-enabled products and services give it an unmatched distribution advantage when introducing new AI features for immediate adoption. Additionally, Alphabet may possess the largest dataset for AI model training, having been focused on AI for nearly a decade, particularly since CEO Sundar Pichai assumed the leadership role in 2015.
Taken together, all these positive attributes played a substantial role in Alphabet's inclusion in Pershing Square's portfolio and retaining its top position.
Should you buy Alphabet stock?
Alphabet's shares have surged by 99% since the commencement of 2023. This growth significantly outperforms the Nasdaq Composite index's total return of 84% throughout the same period. Without a doubt, Alphabet does not appear as attractive an opportunity as it did when Ackman first started investing.
At present, the stock carries a forward P/E ratio of 21.9. Despite showing an increase from its previous level, this is a financially viable entry point. Moreover, it labels Alphabet as the cheapest stock in the "Magnificent Seven" collective.
For investors aspiring to gain exposure to a dominant business that is financially sound and offers AI exposure, Alphabet appears to present a tempting investment opportunity.
Given the success of William Ackman's and Pershing Square Capital Management's investment in Alphabet, it might be enticing for other investors to follow suit. With a significant portion of their assets invested in Alphabet, Ackman believes in the company's growth potential due to its strong presence in digital advertising, cloud computing, and artificial intelligence.
If you're interested in investing in a financially stable company with a long-term growth perspective, Alphabet could be a worthwhile consideration. With its stronghold in digital advertising, growing cloud computing segment, and a substantial lead in AI, Alphabet presents an attractive opportunity for investors seeking exposure to a dominant business.
