Bill Ackman has become famous in the investing world for a number of successful investments in companies ranging from Lowe’s to Chipotle. Historically, however, Ackman hasn’t shown a particularly strong affinity for tech stocks, preferring instead to focus on consumer-facing brands that offer him the strong moats and predictable business models he values.
One rare tech company that has caught Ackman’s eye is Alphabet (NASDAQ:GOOG). Ackman’s Pershing Square Capital owns $1.2 billion in Class C shares (GOOG) and $646 million in Class A shares (GOOGL), cumulatively making up over 19% of the total portfolio.
Why did he snap up shares of Google’s parent, and is the stock still an attractive buy for investors today?
Alphabet’s Unparalleled Search Engine Dominance
Perhaps the most obviously appealing factors about Alphabet for Bill Ackman’s investing style is its ironclad moat.
With about 90% of the world’s search traffic going through Google, it’s all but impossible for another company to disrupt Alphabet’s search engine business.
On the customer side, Alphabet is similarly the go-to option for businesses looking to run ads on search engine results.
It’s also worth noting that this unassailable moat is in the kind of predictable and economically insulated business Ackman overwhelmingly favors. While a downturn will undoubtedly reduce consumer spending and by extension spending on ads, billions of people worldwide will still use Google’s search functions and see its ads.
The same is largely true of YouTube, which the average person in the United States watches for nearly 50 minutes every day. With platforms that are so entrenched in the daily lives of much of the world’s population, it’s clear that Alphabet isn’t going anywhere anytime soon.
Free Cash Flow and High ROIC
Free cash flow and return on invested capital are both metrics that Bill Ackman has publicly said he prioritizes when looking at companies as potential investments. Alphabet offers both in spades, making it a natural fit for Ackman in terms of its financial characteristics.
Alphabet’s ROIC over the last 12 reported months has been 33.9%, a number that’s accompanied by an equally impressive 35.2% return on equity.
In terms of free cash flow, very few businesses in the world can compete with Alphabet. In 2024, the company generated over $70 billion of FCF. This number is moving steadily upward, reflecting the ongoing ability of Alphabet to expand its already attractive business. As recently as 2020,, the company’s FCF was just $42.8 billion.
Alphabet’s Growth Runway
Though Ackman is more of a value investor by nature, he’s also acutely aware of growth opportunities when investing. When Ackman bought his GOOG shares in 2023, Alphabet was already demonstrating that it would be a leader in the emerging field of artificial intelligence. Today, the investments the company made in AI early on are beginning to show real signs of paying off.
This was abundantly clear in Alphabet’s recent Q1 earnings report. Between increasingly popular AI overviews, Gemini and AI tools for advertisers, Alphabet is monetizing AI in a way that very few other companies have managed to.
Though the company’s cloud business growth slowed down a bit in Q1, it still managed to deliver a 28% year-over-year growth rate. This shows that Alphabet is still succeeding in cloud computing, an increasingly valuable complement to its search and advertising business lines.
Looking at Alphabet’s characteristics as a whole, it’s not too difficult to see why it attracted Bill Ackman’s attention. The company has what amounts to an absolute competitive edge in a highly predictable line of business, but what else?
Why Did Bill Ackman Buy Alphabet Stock?
Financially, Alphabet delivers the kind of high ROIC and FCF that Ackman looks for in companies. It also helps that Alphabet carries just $10.9 billion in long-term debt, an amount that is all but insignificant for a company of its size.
Alphabet is slated to keep its upward ascent long into the foreseeable future. As AI continues to improve and develop, Alphabet is likely to remain on the front lines of successfully monetizing the technology. It’s somewhat telling that GOOG is one of only two tech stocks in the Pershing Square portfolio, the other one being Uber.
Ackman appears to be taking a disciplined approach when it comes to high-growth tech investing, selecting companies for their market dominance while avoiding paying multiples that require best-case growth scenarios to justify.
This brings us to the question of Alphabet’s valuation. While the company is part of the group of mega-cap tech stocks that have led the market over the last couple of years, it hasn’t been quite as prone to excessively high pricing as some of its peers. Even in the midst of the AI stock boom, Alphabet rarely traded above 25x earnings.
While not exactly cheap, this has made Alphabet more attractive from a value perspective than the other Magnificent Seven tech companies over the past couple of years. As a value investor, this likely drew Ackman to invest in Alphabet above some of the other exceptional tech businesses that traded at sky-high valuations.
Since Ackman has owned Alphabet since 2023, we can also see how his bet on the tech giant has performed over more than a short period of time. The average cost basis for the GOOG shares owned by Pershing Square was $99.20, and the stock has since risen to about $164. Even set against the last two years of strong market performance, this return is quite impressive.
Even today, Alphabet still looks fairly attractive. Due to concerns around a general economic slowdown and mounting trade tensions, shares of GOOG have slumped off to trade at just 18.3x earnings. As Q1’s results showed, though, Alphabet is still delivering very strong results for its investors. The company also plans to continue investing heavily in new AI tools at a time when other competitors may be compelled to pull back. As such, Alphabet still appears to have a great deal of room left to run as a long-term growth investment.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.