When it comes to investing in artificial intelligence (AI) stocks, it can pay to know where billionaires are putting their money.
Nvidia (NVDA 1.97%) Arguably the world’s most popular artificial intelligence (AI) stock, as evidenced by its 215% rise in the past year alone. That’s not a claim without merit, as the company’s revenue more than doubled in fiscal 2024 (which ended Jan. 28) thanks to its industry-leading AI data center chips.
But if investors want to know where the AI industry is headed next, it can be helpful to know where billionaires are putting their money. For example, Bill Ackman manages a $10 billion stock portfolio for his hedge fund, Pershing Square Capital Management, and he doesn’t own Nvidia at all.
Instead, Ackman owns a $1.9 billion position in the Google parent. the alphabet (GOOG -0.30%) (GOOGL -0.29%). Not only has it already made a solid return on that investment, but the stock is still cheap and could be primed for further upside thanks to the company’s AI initiatives.
Here’s why it’s not too late for investors to follow Ackman’s lead.
Image source: Alphabet.
Microsoft offered Ackman the opportunity to buy Alphabet.
It’s no coincidence that Bill Ackman bought Alphabet stock in the first quarter of 2023 when Microsoft (MSFT -0.71%) announced a $10 billion investment in leading AI startup OpenAI. Microsoft quickly integrated OpenAI’s ChatGPT technology into its Bing search engine, attempting to disrupt Google’s 91% market share in the Internet search industry.
Traditional search engines like Google typically have the user sift through web pages for the information they want, while Bing’s new chatbot interface can provide instant answers to almost any question. It’s a much simpler experience. Alphabet’s stock sank as investors worried the company was falling behind Microsoft on the AI front, but Ackman saw it as a buying opportunity.
In a recent interview with David Rubinstein, Ackman said that Alphabet’s value had fallen so much that it was leveraging the company’s existing businesses, such as search and YouTube, while its AI initiatives were essentially free. are being obtained.
It’s interesting to note that Ackman realized that Alphabet’s AI technology was in sync with OpenAI when he invested, even though Alphabet had not yet launched its own AI chatbot.
Alphabet’s Gemini now outperforms OpenAI’s latest GPT-4 models.
Shortly after Microsoft announced its OpenAI investment, Alphabet reminded investors that it had been working on AI for years. Finally, Google acquired AI startup DeepMind in 2014. That’s why it only took a few months for Google to launch Bard, a chatbot designed to compete directly with ChatGPT.
The quality of a creative AI application comes down to the quality of the developer’s data, and since Google has been the window to the Internet for decades, it has more useful information for building AI applications than any other company. .
Bard paved the way for Alphabet’s latest and largest family of AI models called Gemini, which launched in December. According to Alphabet, Gemini outperformed OpenAI’s latest GPT-4 models in most multimodal benchmarks. In other words, it is able to more accurately interpret and create textual content, images, videos, and computer code.
Alphabet announced the release of Gemini 1.5 in February, which is even more advanced. The company says it’s far better at “learning in context,” meaning it can learn new skills from user input without requiring additional fine-tuning from developers. In a test, Alphabet gave Gemini 1.5 a grammar manual for a rare language called Kalaming — with fewer than 200 speakers worldwide — and it could translate it for human subjects at the same level that Used the same learning material.
Gemini is now available as a standalone chatbot, but its technology has also been built into the traditional Google search engine to provide users with text-based answers in their search results. It balances the traditional search and chatbot experience, reducing the amount of time users spend clicking through to third-party web pages for the information they need.
Ackman is sitting on big gains, but Alphabet stock could still go higher.
Ackman bought the bulk of Pershing Square’s Alphabet position in Q1 2023 at an estimated average price of $96.56. That means he’s sitting on a 60% profit based on the stock’s current price of $154.85. Ackman added to its holdings in the second and third quarters of 2023, and is sitting on profits on those positions as well. But it’s not too late for investors to follow his lead, as the stock is still relatively cheap.
Alphabet achieved record revenue of $307.4 billion in 2023, with earnings per share (ie, dividends) of $5.80. The latter holds Alphabet stock at a price-to-earnings (P/E) ratio of 26.7. That means Alphabet is the second-cheapest stock among the six U.S. tech giants worth $1 trillion or more:
PE ratio data via YCharts
Advertising dollars generated by Google search still account for the majority of Alphabet’s revenue. However, Google Cloud is the company’s fastest-growing segment thanks to its growing portfolio of AI services. Businesses and developers can access the latest data center infrastructure and major language models including Gemini on Google Cloud to build their own AI applications.
Alphabet is also building Gemini into its other products, such as Google Docs and Gmail, offering a productivity boost to users who can now use AI to quickly create content in those applications. are Longer-term, Alphabet is reportedly in talks. apple to make Gemini the default AI chatbot on the company’s devices, including the iPhone. Details are scarce, but this could be an incredible opportunity, considering Apple has more than 2.2 billion devices installed worldwide.
I think Ackman made a fantastic bet on Alphabet, and the value of its $1.9 billion position is likely to increase.
Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Randy Zuckerberg, former director of market development and spokeswoman for Facebook and sister of MetaPlatforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of The Motley Fool, an Amazon subsidiary. Anthony DiPizio has no position in any stocks. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, MetaPlatforms, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a Disclosure Policy.