Renowned hedge fund manager Bill Ackman has made a significant move in his portfolio by adding more Alphabet Inc. (GOOG, GOOGL) stock worth over $1 billion. While this investment in the tech giant may raise eyebrows, it reflects Ackman’s belief in Alphabet’s potential in the growing field of artificial intelligence (AI). This move comes amidst a debate among investors regarding Alphabet’s ability to establish an AI moat, particularly in comparison to other tech giants like Microsoft.
A Tale of Two Chatbots: Microsoft’s Investment in OpenAI and Alphabet’s Response
Microsoft’s substantial investment in OpenAI, the parent company of ChatGPT, raised questions about its intention to challenge Alphabet’s dominance in online search through Google. Microsoft integrated ChatGPT into various aspects of its business, including an AI-powered version of its search tool, Bing.
In response, Alphabet swiftly introduced its own AI tool, Google Bard, as a rival to ChatGPT. However, the initial unveiling left much to be desired, with Bard providing inaccurate answers. This misstep led to a decline in Alphabet’s stock value, prompting some prominent investors like Brad Gerstner of Altimeter Capital to voice their doubts about the company’s AI capabilities.
The debate: Monopoly on search vs. AI’s expanding landscape
Gerstner’s perspective centers on Alphabet’s monopoly in consumer search but doubts whether this dominance will extend to the broader AI landscape. He argues that despite Alphabet’s search monopoly, numerous AI-powered tools and services in the market will prevent the company from achieving the same level of dominance in AI.
However, Bill Ackman appears to focus on the broader picture. He believes that Alphabet’s vast ecosystem and access to an immense volume of data provide a competitive edge. The ability to integrate data across its diverse suite of products allows Alphabet to train its AI models effectively. Additionally, Ackman notes that Alphabet’s venture into designing its own chips aligns with its strategy for AI advancement.
The role of Cloud and AI: A compelling investment case
Gerstner acknowledges in a follow-up post that Alphabet’s cloud services will greatly benefit from AI integration. While Amazon and Microsoft currently dominate the cloud infrastructure market, Alphabet is quickly catching up, largely thanks to AI. This perspective indirectly supports Ackman’s investment thesis, emphasizing the value of Alphabet’s AI potential beyond search.
Valuation comparison: Alphabet appears attractive
Comparing price-to-earnings (P/E) ratios for major tech players – Microsoft, Amazon, Nvidia, and Alphabet – reveals a surprising finding. Alphabet’s P/E ratio is more than 28 times earnings, the lowest among this group. This stands out, especially considering Amazon’s recent return to positive free cash flow. In essence, Alphabet’s relatively lower P/E ratio suggests that it may be undervalued compared to its peers.
Alphabet is experiencing a resurgence in its advertising business, fiercely competing with platforms like TikTok. Moreover, its cloud segment is not only growing rapidly but also achieving consistent profitability.
In the rapidly evolving landscape of artificial intelligence, it’s premature to declare definitive winners and losers. However, Bill Ackman’s increased investment in Alphabet underscores the company’s compelling potential in the AI space. Ackman’s perspective on Alphabet’s ecosystem, data advantages, and attractive valuation sets the stage for further debate among investors. As technology continues to advance, Alphabet’s various businesses serving both consumers and enterprises position it as a compelling choice for AI-focused investments. The debate over Alphabet’s AI moat is far from settled, but Ackman’s bet suggests that he sees substantial value in the tech giant’s future.
