Billionaire Bill Ackman has invested nearly 20% of his Pershing Square portfolio in 1 “Magnificent Seven” stock

By | February 26, 2024

Securities and Exchange Commission (SEC) disclosure requirements allow individual investors to keep an eye on the trading movements of high-profile investors. Bill Ackman, a billionaire hedge fund manager of Pershing Square Capital, is someone who may be worth following given his impressive track record since founding his company in 2004.

At the end of 2023, Ackman’s portfolio had 18.5% of its assets combined in Alphabet‘S (NASDAQ: GOOG) (NASDAQ: GOOGL) Class A and Class C shares. This makes the “Magnificent Seven” stock its largest position.

I consider this a huge vote of confidence in the tech titan. The Magnificent Seven are among the most dominant, innovative and disruptive companies we’ve ever seen, and they’ve rewarded investors over the past decade. Still, Ackman decided to take a significant stake in the digital advertising giant.

Let’s see what factors cause this hedge fund manager optimistic about Alphabet’s prospects. Then you can decide for yourself whether shares are worth buying.

A clear investment thesis

In the June 2023 investor letter, Bill Ackman said that Google (Alphabet’s main subsidiary) is “one of the largest companies in the world.” There are numerous reasons why he holds this view.

For starters, Google Search, which generated 57% of company revenue by 2023, benefits from high barriers to entry and powerful network effects. It has a monopoly position in the global search industry, with a market share of over 91%. Add this wide reach to YouTube’s dominance and it’s no surprise that Alphabet is the leader when it comes to global digital advertising.

Ackman believes there is still plenty of room for the company to grow revenue near double digits in the future. He believes that many more marketing spends will shift from offline to online. And Alphabet will be the main beneficiary of this trend.

We can’t overlook Google Cloud, which saw its revenue increase by 26% last year. The fast-growing division has now reported positive operating results for four quarters in a row.

Like many other companies in the technology sector, Alphabet has prioritized pursuing efficiencies after soaring gains during the pandemic. Significant layoffs and continued cost savings should lead to better profit margins in the long term, according to Ackman.

He also discussed how Alphabet has been a leader in the field artificial intelligence (AI) long before the current boom took hold of the economy. The company has products and services used by billions of people, allowing it to collect vast amounts of data that can lead to continuous improvements and continuous feature introductions.

Alphabet’s financial strength is another attractive quality. A net cash position of $98 billion, large amounts of free cash flow, and consistent buy back shares were other factors that caught Ackman’s attention.

Should You Buy Alphabet Stock?

The reason Pershing Square bought shares of Alphabet in the first half of 2023 was because of its attractive valuation. The hedge fund bought shares at a price of forward price-earnings ratio (P/E) ratio of 16, which was an absolute bargain.

Investors were concerned about the launch of OpenAI’s ChatGPT and its integration Microsoft‘s Bing search engine would mark the beginning of the end for Alphabet. The thinking was that Google Search would no longer be the dominant force in digital advertising due to a potential change in the way people would search for information. In retrospect, these fears seem exaggerated.

Even after the stock’s 57% rally in the last twelve months, I still think the situation is attractive to potential investors. The stock currently trades at a price-to-earnings ratio of 21.3. That is far from expensive.

To be clear, it’s best not to blindly follow other investors, no matter how successful and well-valued they are. Always try to think independently and understand companies for yourself before purchasing anything. If you’re confident in Alphabet’s prospects, it’s a good idea to add the stock to your portfolio.

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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Neil Patel has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.

Billionaire Bill Ackman has invested nearly 20% of his Pershing Square portfolio in 1 “Magnificent Seven” stock, originally published by The Motley Fool

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