One of the most closely watched investors on Wall Street is Bill Ackman, CEO of Pershing Square Capital Management. While Ackman’s portfolio has billions of dollars in investment capital, the hedge fund manager owns just seven individual stocks.
Among this small cohort is just one tech company: a member of the Magnificent Seven. Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). Earlier this month, Oppenheimer’s Jason Helfstein raised his price target for Alphabet shares to $185 — representing roughly 17% from current trading levels as of the April 22 market close.
Let’s find out why Ackman and others on Wall Street feel strongly about Alphabet, and consider whether now is a good opportunity to pick up some stock.
Advertising is a cash cow, but…
Alphabet’s main drivers of revenue and profit come from advertising. Given that the company owns the internet search website Google and the video sharing platform YouTube, it’s safe to say that Alphabet has a huge online presence.
The table below illustrates the growth trends in Alphabet’s advertising business over the past few years.
|
Category |
2023 |
2022 |
2021 |
|---|---|---|---|
|
Google Search and more |
8% |
9% |
43% |
|
YouTube ads |
8% |
1% |
46% |
|
Google Network |
(4%) |
3% |
37% |
|
Total Google Advertising |
6% |
7% |
43% |
Data Source: Alphabet Investor Relations
In recent years, Alphabet has been forced to fight off a number of competitors entering its advertising business. Meta platforms owns multiple social media apps including Facebook, Instagram and WhatsApp. In addition, TikTok’s growing popularity has also affected Alphabet’s appeal to advertisers.
Nevertheless, even amid slowing growth in its biggest business, Alphabet remains very profitable. I think investors are miscalculating this dynamic.
Of course, the advertising segment is witnessing an existential crisis. However, Alphabet’s robust operating margins are trickling down to the bottom line. And the company is making some smart investments in new growth drivers that are already paying off.
…artificial intelligence (AI) is the new engine of growth
In addition to advertising, Alphabet 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 the Google Pixel phone.
Investors should be interested to know that the services business is very profitable, generating $95.6 billion in operating income in 2023, up 16% year-over-year. In addition, the cloud division is now consistently profitable. Alphabet’s cloud segment posted a $1.7 billion operating profit last year, compared to a $1.9 billion loss in 2022.
One of the main reasons Alphabet has been able to generate consistent, robust profitability metrics across so many different areas of its business is thanks to AI.
In his 2023 letter to shareholders, Ackman emphasized that “Alphabet’s competitive positioning in AI has overshadowed the high-quality nature of its business and strong growth prospects.” It’s a nice way to hint at some investors who see better opportunities than Alphabet when it comes to AI.
However, the trends discussed above undermine Ackman’s position when it comes to Alphabet’s business model. As the company continues to integrate AI throughout its ecosystem, investors should begin to see an exponential jump in the company’s revenue and profit profiles across the many different areas in which Alphabet operates.
Is it a good time to invest in Alphabet?
As of this writing, Alphabet’s price-to-earnings (P/E) ratio of 26.9 is the second-lowest among the Magnificent Seven—just over An apple.
What’s more, the company’s price-free cash flow is essentially identical to Alphabet’s 10-year average. Given how much Alphabet has grown over the past decade and how different the company is today compared to 10 years ago, I think investors may be discounting future growth opportunities sharply.
I think now is a lucrative chance to buy Alphabet on an undervalued AI narrative. The stock looks awfully cheap compared to its peers, and with so much upside potential, it’s hard to pass this one up.
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Suzanne Frey, CEO of Alphabet, is a member of The Motley Fool’s board of directors. Randy Zuckerberg, former Facebook CMO and spokesperson and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Spattaco has positions in Alphabet, Apple and Meta platforms. The Motley Fool has positions and recommends Alphabet, Apple and Meta platforms. The Motley Fool has a disclosure policy.
Once-in-a-Generation Investment Opportunity: Bill Ackman’s 1 Artificial Intelligence (AI) Stock to Buy Before It Jumps 17%, According to 1 Wall Street Analyst Originally published by The Motley Fool
