The average investor can learn a lot by following some of the professionals in the industry. Take Bill Ackman , whose strategy -- probably influenced by the great Warren Buffett -- focuses on making concentrated bets in high-quality businesses trading at compelling valuations.
Ackman's hedge fund firm , called Pershing Square Capital Management, currently manages $10.8 billion in assets. Rather than blindly following his portfolio decisions, investors should try to understand why he owns what he does.
One of Ackman's top holdings is tech titan Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) . Let's look at what factors may have drawn the hedge fund manager's attention to this dominant " Magnificent Seven " company.
Quality business
Pershing Square first purchased shares in Alphabet over a year ago during the first quarter of 2023. It might be surprising to see it quickly becoming a huge position. But Ackman went so far as to call this "one of the world's greatest businesses." That might be a bold statement, but I wouldn't disagree with his assessment.
Most readers are familiar with Google Search. With 91% share of the global search industry, this is undoubtedly Alphabet's bread-and-butter segment. Ackman calls out its powerful network effects and high barriers to entry.
Acquired by the business in 2006 for over $1.6 billion, YouTube also deserves some attention. Not only does it possess network effects as well, but it supports Alphabet's dominance in the digital ad industry. Ackman believes that the business is well-positioned to continue growing its sales over time due to the shift away from offline advertising to online methods.
Alphabet is poised to benefit from another secular trend, which is cloud computing. As IT spend transitions from on-site to off-premises, Google Cloud should continue its rise. This segment posted a 26% revenue gain in 2023, and it's now generating consistent operating income.
If you look through the Pershing Square portfolio, you'll realize that Ackman appreciates companies that are in a strong financial position. There are very few businesses in the world that can match Alphabet in this regard. As of March 31, it did carry $13.2 billion of long-term debt on the balance sheet. However, the company had $108.1 billion of cash, cash equivalents, and marketable securities, virtually eliminating any financial risk.
AI leader
The artificial intelligence (AI) boom is drawing lots of attention from the investment community. After Chat GPT was first launched in late 2022, the market was worried that Alphabet was falling behind rivals when it came to developing this technology and introducing new features. But Ackman believes that this concern was overblown.
Alphabet was using AI in Search as far back as 2001. And nearly all of its offerings, from YouTube and Maps to Gmail and Google Cloud, all utilize AI in some way. The fact that this business has such wide reach means that it can launch new AI features to almost instant adoption. Plus, Alphabet has the financial resources and technological know-how to be one of the leaders in AI going forward.
Is it too late to buy Alphabet stock?
With the benefit of hindsight, Ackman's purchase of Alphabet shares looked like an incredibly timely move. When his firm started buying the stock, it traded at a compelling forward price-to-earnings (P/E) ratio of just 16. This investment has worked out extremely well thus far, as shares are up 109% in the past 18 months.
Of course, the situation isn't as much of a no-brainer these days. As of this writing, Alphabet stock sells at a forward P/E multiple of 24.4. While not as good as the price Ackman paid, I still think this valuation makes shares a smart buy today.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy .
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