Bill Ackman has made several investments in recent years to take advantage of the massive opportunities in artificial intelligence (AI). He bought Alphabet to his hedge fund, Pershing Square Capital, in 2023, when many saw him as a net loser from the rise of AI chatbots like ChatGPT. He bought more Amazon last year amid a brief sell-off in the market, recognizing its strong position in cloud computing and AI. So far, its investments in artificial intelligence have paid off well, exceeding S&P 500.
AI’s most recent stock purchase is already up 1,650% since its IPO, but Ackman sees plenty of room for the stock to continue growing. Meanwhile, it completely exited a stock that Pershing Square has owned since 2018: Hilton Worldwide(NYSE: HLT).
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Bill Ackman originally bought Hilton stock in 2018, adding to it about 18 months later, near the start of the COVID-19 pandemic. The company’s portfolio caters to a wide range of travelers and includes some very strong brands with high customer loyalty. In fact, Hilton has grown its loyalty members to 243 million, up from 85 million when Ackman originally bought stock.
Over the past seven years, Hilton has reduced its corporate overhead expenses, with the largest increase in expenses being driven by the expansion of its franchises and locations. The company now has more than 1.3 million cameras in its portfolio, up from 913,000 at the end of 2018. As a result, adjusted EBITDA has grown from $2.1 billion to $3.7 billion over the past seven years.
There is still a lot of growth as well. Management said it has a backlog of 520,500 rooms and expects revenue per available room to return to between 1% and 2% growth. Overall, EBITDA should exceed $4 billion this year.
But the stock climbed even faster than the financial results. The stock price is up more than 350% since the end of 2018. Enterprise value (EV) has tripled, putting the EV-EBITDA ratio near 21.5, based on management’s outlook. Its forward price-to-earnings (P/E) ratio of 36 is also quite high, suggesting that the stock’s future returns may not match those of the past few years. It makes sense for Ackman to take the gains and look for better opportunities with higher potential returns.
Pershing Square said it completely exited its position in Hilton earlier this year during its annual presentation to shareholders.
Ackman revealed the latest AI stock purchase from Pershing Square at the annual presentation: Meta platforms(NASDAQ: META). Ackman noted, “Meta’s business model is one of the clearest beneficiaries of AI integration.”
He believes the stock’s weakness related to investor fears about overspending on AI infrastructure and staff is an opportunity for long-term investors. He points out that the stock’s forward P/E is now around 22, and if you strip out Reality Labs, its augmented reality business, the core advertising business trades for just 18 times earnings. It’s an incredible deal given the company’s growth prospects.
That growth is fueled by its advances in artificial intelligence, which could support Pershing Square’s medium-term outlook for annual earnings per share growth of 20%. AI is at the heart of Meta’s recommendation algorithm, which has helped drive engagement on Facebook and Instagram. This allowed it to serve more ads, with ad impressions up 18% in the fourth quarter. Just as importantly, its algorithms help target ads and make them more effective, leading to a 6% increase in average ad price in the last quarter.
The potential for generative AI to expand its customer base for advertising is huge. Not only could it lower the barrier to entry for advertising on Facebook and Instagram, but it could also open up new avenues for advertising, such as chatbots in Messenger and WhatsApp. Meta can also explore advertising in its own Meta AI chatbot (its answer to ChatGPT) built into all its apps.
Of course, improving and expanding the use of AI products comes at a significant cost. Meta told Wall Street it will spend between $115 billion and $135 billion on capital expenditures this year. That’s a 73% increase over last year, in the middle. Ackman argues that Meta’s growth potential from AI supports the anticipated loading of infrastructure costs and that the risk of overbuilding is mitigated by the ability of core businesses to grow to excess capacity. In addition, it has a strong enough balance sheet to support growth.
At 22 times forward earnings, the current price still presents a very attractive entry point for stellar AI stock.
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Adam Levy has positions in Alphabet, Amazon and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon and Meta Platforms. The Motley Fool has a disclosure policy.
Billionaire Bill Ackman sold Hilton worldwide and bought this artificial intelligence (AI) stock up 1,650% since its IPO was originally reported by The Motley Fool
