The average investor can learn a lot by following industry professionals. Bill AckmanThe firm’s strategy, perhaps influenced by the great Warren Buffett, focuses on concentrated investments in high-quality companies trading at attractive valuations.
Ackmans Hedge fund companyThe firm, called Pershing Square Capital Management, currently manages $10.8 billion in assets, and investors should try to understand why he holds the assets he does, rather than blindly following his portfolio decisions.
One of Ackman’s biggest holdings is a tech giant. alphabet (Nasdaq: GOOGL) (Nasdaq: GOOG)Let’s take a look at what attracted hedge fund managers to these leading companies, known as the Magnificent Seven.
Quality Business
Pershing Square first bought shares in Alphabet over a year ago, in Q1 2023. It may be surprising that it has grown into such a large position so quickly, but Ackman went so far as to call it “one of the biggest companies in the world.” That may be a bold statement, but I don’t disagree with his assessment.
Most readers will be familiar with Google Search. With a 91% share of the global search industry, it is undoubtedly Alphabet’s flagship business. Ackman said: Network Effects The barriers to entry are also high.
Also of note is YouTube, which the company acquired for more than $1.6 billion in 2006. YouTube not only has network effects but also helps power Alphabet’s dominance in the digital advertising industry, and Ackman believes YouTube is well-positioned to continue growing revenues in the future due to the shift from offline to online advertising.
Alphabet is poised to benefit from another long-term trend: cloud computing. Google Cloud should continue to grow as IT spending shifts from on-site to off-premises. The segment is expected to post 26% revenue growth in 2023 and currently generates stable operating profits.
A look at Pershing Square’s portfolio shows that Ackman values companies with strong financial positions. Few companies in the world can match Alphabet in this regard. As of March 31, the company had $13.2 billion in long-term debt on its balance sheet. But it also had $108.1 billion in cash, cash equivalents, and marketable securities, essentially eliminating financial risk.
AI Leader
of artificial intelligence The AI boom has attracted a lot of attention from the investment community. After Chat GPT was first launched in late 2022, the market was concerned that Alphabet was lagging behind its competitors in developing the technology and introducing new features. But Ackman believes these concerns were overblown.
Alphabet has been using AI in search since 2001. Nearly everything the company offers, from YouTube and Maps to Gmail and Google Cloud, uses AI in some way. The breadth of this business means that any new AI feature it releases can be adopted almost immediately. Plus, Alphabet has the money and technical know-how to be one of the leaders in AI going forward.
Is it too late to buy Alphabet shares?
In hindsight, Ackman’s purchase of Alphabet stock seems like a very timely move: When his company started buying shares, the stock was trading at an attractive price. Forward price-to-earnings ratio (P/E) That’s just 16. This investment has paid off very well so far, with the share price up 109% in the past 18 months.
Of course, things haven’t been that simple these days. As of this writing, Alphabet shares are trading at 24.4 times forward earnings. While not as much as Ackman paid, we still think this valuation makes it a smart buy today.
Should you invest $1,000 in Alphabet right now?
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Suzanne Frey, an executive at Alphabet, serves on The Motley Fool’s board of directors. Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet. The Motley Fool has a disclosure policy.
Billionaire Bill Ackman has about 20% of his Pershing Square portfolio invested in the “Magnificent Seven” stocks, which were originally published by The Motley Fool.
