Bill Ackman's only technology is an attractive buy on the heels of the AI revolution.
One of the hottest investors on Wall Street is Bill Ackman, CEO of Pershing Square Capital Management. Mr. Ackman has billions of dollars in investment capital in his portfolio, but the hedge fund manager owns only seven individual stocks.
Within this small group, there is only one technology company. Member of “Magnificent Seven”. alphabet (GOOG 9.96%) (Google 10.22%). Earlier this month, Oppenheimer's Jason Helfstein raised his price target on Alphabet stock to $185, representing about 17% of its current trading level as of market close on April 22nd.
Let's dig into why Ackman and the rest of Wall Street believe so strongly in Alphabet, and evaluate whether now is a good time to buy the stock.
Advertising is a cash cow, but…
Alphabet's core revenue and profit driver comes from advertising. It's no exaggeration to say that Alphabet has a huge online presence, considering the company owns internet search website Google and video sharing platform YouTube.
The table below shows the growth trends of Alphabet's advertising business over the past few years.
Category | 2023 | 2022 | 2021 |
---|---|---|---|
Google search etc. | 8% | 9% | 43% |
YouTube ads | 8% | 1% | 46% |
Google network | (Four%) | 3% | 37% |
Google Ads total | 6% | 7% | 43% |
In recent years, Alphabet has had to battle a number of competitors that are encroaching on its advertising business. meta platform It owns a host of social media applications such as Facebook, Instagram, and WhatsApp. Additionally, TikTok's growing popularity is also hurting Alphabet's appeal to advertisers.
Nevertheless, Alphabet continues to generate strong profits even as growth in its largest business has slowed. I think this dynamic is precisely where investors are miscalculating.
Indeed, the advertising segment is facing an existential threat. But Alphabet's strong operating profits are spilling over into its bottom line. And the company is making smart investments in new growth drivers, and we're already seeing the results.
…artificial intelligence (AI) will be the new growth driver
In addition to advertising, Alphabet also has services and cloud computing businesses. The Services segment includes YouTube TV and NFL Sunday Ticket subscriptions, purchases from the company's app store, and sales from devices such as Google Pixel phones.
Investors should know that the services business is highly profitable, generating operating income of $95.6 billion in 2023, up 16% year over year. Moreover, the cloud division is now consistently profitable. Last year, Alphabet's cloud division reported an operating profit of $1.7 billion, compared to an operating loss of $1.9 billion in 2022.
One of the main reasons Alphabet has been able to generate consistent and robust profitability metrics across different areas of its business is because of AI.
In his 2023 letter to shareholders, Ackman outlined that Alphabet's “competitive position in AI overshadows the high-quality nature of its business and strong growth prospects.” This is a good way to hint that some investors see a better opportunity than Alphabet when it comes to AI.
However, the trends discussed above undermine Ackman's position regarding Alphabet's business model. As the company continues to integrate AI across its ecosystem, investors should begin to notice a sharp increase in the company's revenue and margin profile across the various verticals in which Alphabet operates. .
Is now a good time to invest in Alphabet?
As of this writing, Alphabet's price-to-earnings ratio (P/E) of 26.9 is the second-lowest of the Magnificent Seven, trailing it by a narrow margin. apple.
Additionally, the company's price-to-free cash flow is essentially the same as Alphabet's 10-year average. Considering how much Alphabet has grown over the past 10 years, and how much the company is different today than it was 10 years ago, I think investors are seriously discounting future growth opportunities. Masu.
I think now is a good time to buy Alphabet based on its undervalued AI story. It's hard to pass on this stock as it looks very cheap compared to its peers and has so much upside potential.
Alphabet executive Suzanne Frye is a member of The Motley Fool's board of directors. Randi Zuckerberg is a former Facebook market development director and spokesperson, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool's board of directors. Adam Spatacco has held positions at Alphabet, Apple, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Apple, and Meta Platform. The Motley Fool has a disclosure policy.