One of the most followed investors on Wall Street is Bill Ackman, CEO of Pershing Square Capital Management. While Ackman’s portfolio contains billions of dollars of investment capital, the hedge fund manager only owns seven individual stocks.
Among this small cohort, there is only one technology company: a member of the “Magnificent Seven”. Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). Earlier this month, Oppenheimer’s Jason Helfstein raised his price target on Alphabet stock to $185, about 17% from current trading levels as of the market’s close on April 22.
Let’s take a look at why Ackman and others on Wall Street have strong beliefs about Alphabet and evaluate whether now is a good opportunity to pick up some shares.
Advertising is the cash cow, but…
Alphabet’s primary revenue and profit drivers come from advertising. Given that the company owns the Internet search site Google and the video sharing platform YouTube, it’s safe to say that Alphabet has a huge online presence.
The table below illustrates growth trends in Alphabet’s advertising business over the past several years.
|
Category |
2023 |
2022 |
2021 |
|---|---|---|---|
|
Google search and others |
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 battle a number of competitors that were encroaching on its advertising business. Metaplatforms has a multitude of social media apps, including Facebook, Instagram and WhatsApp. Additionally, TikTok’s growing popularity has also taken a toll on Alphabet’s appeal to advertisers.
Still, even in the face of slowing growth in its largest business, Alphabet remains highly profitable. It’s this dynamic that I think investors miscalculate.
Of course, the advertising segment is experiencing an existential crisis. However, Alphabet’s strong operating margins are reflected in its financial results. And the company is making smart investments in new growth drivers that are already paying off.
…artificial intelligence (AI) is the new growth engine
In addition to advertising, Alphabet has a services business and a cloud computing business. The Services segment includes subscriptions to YouTube TV and NFL Sunday Ticket, purchases on the company’s app store, and sales from devices such as the Google Pixel phone.
Investors should note that the Services business is very profitable, generating $95.6 billion in operating profit in 2023, up 16% year-over-year. Additionally, the cloud division is now consistently profitable. Last year, Alphabet’s cloud segment reported an operating profit of $1.7 billion, compared to a loss of $1.9 billion in 2022.
AI is a key reason why Alphabet has been able to generate consistent and robust profitability metrics across many different areas of its business.
In his 2023 shareholder letter, Ackman noted that Alphabet’s “competitive positioning in AI overshadowed the high-quality nature of its…
