Billionaire investor Bill Ackman recently bought stock in Alphabet (GOOG 0.07%) (GOOGL 0.18%) for his hedge fund Pershing Square Capital Management. He started the position during the first quarter, but news of the purchase only surfaced this week, days after Alphabet introduced new artificial intelligence (AI) products at its I/O developer conference.
Of course, those products had nothing to do with Ackman’s decision, but as one of the foremost AI companies in the world, Alphabet is well positioned to benefit from soaring demand for AI software. That likely contributed to the decision, and Ackman seems to have a great deal of confidence in the company. His investment in Alphabet is worth more than $1 billion, split between Class A and Class C shares, and it accounts for over 10% of his portfolio.
So what? Pershing Square absolutely crushed the S&P 500 (^GSPC 0.36%) during the last five years. The hedge fund soared 239% in that time, but the benchmark S&P 500 index increased just 70%. That makes Ackman a great source of inspiration, and given the latest addition to his portfolio, investors should take a closer look at Alphabet.
Alphabet has a strong presence in two growing markets
Alphabet has undoubtedly struggled over the past year. Revenue rose just 5% to $284 billion, a significant deceleration from 47% growth a year earlier, and net income declined 19% to $4.49 per diluted share. But those lackluster results can be attributed to the challenging economic climate. High inflation and rising interest rates have suppressed consumer spending, forcing businesses to cut ad budgets and curb IT investments.
That has naturally been bad news for Alphabet, a company that makes most of its money from digital advertising and cloud computing services. But bad news often creates buying opportunities for patient investors. Alphabet stock is down 20%, and shares currently trade at 5.5 times sales, a discount to the five-year average of 6.3 times sales. That price looks reasonable given its strong competitive position in ad tech and cloud computing, two markets forecasted to grow at 14% annually through 2030.
Alphabet is the largest ad tech company on the planet. It raked in nearly 30% of global digital ad spend last year, and while the company is losing market share to up-and-comers like Amazon, Alphabet will still account for 29% of global digital ad spend in 2024, according to eMarketer. That success can be traced back to its lineup of popular web properties. Google Search, YouTube, and Chrome are the most popular search engine, streaming service, and web browser, respectively. Those assets make Alphabet an irreplaceable advertising partner.
Meanwhile, Google Cloud Platform (GCP) is gaining ground in cloud computing. The company held 10% market share in cloud infrastructure and platforms services (CIPS) in the first quarter, up from 8% last year, indicating that its revamped go-to-market strategy and continuous product development efforts are paying off. Indeed, consultancy Gartner recently noted that GCP is improving its CIPS capabilities faster than any other cloud provider. That means the company is well positioned to maintain its momentum in the future.
Alphabet is investing in artificial intelligence (AI)
OpenAI has ignited tremendous interest in AI with its viral application ChatGPT, but the market is still early in its adoption of the technology. According to Ark Invest, AI software revenue will grow at 42% annually to reach 14 trillion by 2030. That means there is plenty of room for multiple winners, and Alphabet is well positioned to be one of those winners.
Google has used AI to improve search relevance and ad performance for over a decade, and the company is clearly doing something right given its leadership in both markets. But that is just the tip of the iceberg. Industry experts have also recognized Alphabet a leader in other AI verticals, including AI infrastructure, conversational AI platforms, and AI-powered document analytics. And the company recently unveiled several exciting products at its I/O developer conference.
One of the most exciting updates is its new large language model PaLM 2, which brings generative AI capabilities to more than 25 other products. For instance, PaLM 2 helps users compose content in Gmail and Google Docs, organize data in Google Sheets, and generate AI images from text descriptions in Google Slides. PaLM 2 also powers Bard, an intelligent chatbot meant to rival ChatGPT. Bard can handle a wide range of questions, from common sense logic to complex math, and it can now help developers write code.
Here’s the bottom line: Alphabet is investing aggressively in AI, building on years research and development. Those efforts could reinforce its dominance in digital advertising, help it gain share in cloud computing, and open brand new revenue streams for the company. With shares trading at a discount to their historical valuation, investors should consider buying a position in this growth stock today.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon.com. The Motley Fool has positions in and recommends Alphabet and Amazon.com. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
