Bill Ackman sold Alphabet shares in the second quarter, despite most analysts being bullish on the stock.
Bill Ackman is the founder and CEO of Pershing Square Capital Management, a hedge fund that has delivered an annual return of 22% over the past five years. For comparison: the S&P500 (^GSPC 0.16%) returned 16% annually over the same period. That outperformance makes Ackman a good case study for aspiring investors.
In the second quarter, Ackman sold 2.2 million shares Alphabet (GOOGL 1.77%) (GOOG 1.66%)reducing its stake by 16%. Importantly, while Alphabet is still the largest position in Ackman’s portfolio, his decision to sell was nonetheless surprising as Wall Street has been consistently bullish.
Currently, 79% of the 67 analysts covering Alphabet rate the stock as a buy and the remaining 21% as a hold. No analysts are currently recommending selling, and that was true in the second quarter as well. Furthermore, the average price target of $205 per share implies an upside of 23% from the current share price of $166.
Does Ackman know something that Wall Street is missing?
Alphabet has a strong position in advertising and cloud computing, supported by expertise in artificial intelligence
Alphabet is the parent company of Google, the largest digital advertiser and the third largest public cloud by revenue. The power of digital advertising is driven by high-traffic websites like Google Search and YouTube, which allow companies to engage users and collect data on an unprecedented scale. In turn, these assets help advertisers present relevant marketing content to consumers on the Internet.
Meanwhile, the power of cloud computing is a product of technical expertise in areas such as data science, artificial intelligence (AI) and machine learning (ML). For example, Forrester research recently ranked Google as a leader in AI infrastructure solutions, foundational large language models, and AI/ML platforms. Additionally, lead analyst Mike Gualtieri wrote, “Google is the best-positioned hyperscaler for AI.”
In summary, Alphabet has a strong competitive position in two large and growing markets, and is very well positioned to benefit from the AI boom. Looking ahead, eMarketer estimates that digital ad spending will grow 10% annually through 2028, and IDC estimates that spending on public cloud services will grow 19% annually over the same period, driven by robust demand for AI platform services. That bodes well for Alphabet and its shareholders.
Why did Bill Ackman cut his position in Alphabet in the second quarter? We can only speculate about the answer. Maybe it was nothing more than profit-taking, or maybe he was concerned about stock price volatility surrounding an antitrust case. Alternatively, Ackman may have been concerned about valuation, as Alphabet shares rose 21% during the quarter.
Ackman may have trimmed his position in Alphabet to limit volatility due to an antitrust lawsuit
Bill Ackman’s reason for selling Alphabet may have been to limit volatility as an antitrust case reached a critical stage. To elaborate, the Justice Department sued Google in 2020 for creating an illegal monopoly in internet search through exclusionary agreements that made competition from smaller companies virtually impossible.
Ackman knew a ruling would come in the third quarter, so he may have reduced his stake in Alphabet in the second quarter to hedge against a sharp decline. If that was his plan, it probably paid off to some extent. Federal Judge Amit Mehta ultimately ruled against Google, ruling that the company indeed acted illegally to maintain its dominance in Internet search. The stock fell 22% between July and September.
Importantly, the Justice Department has proposed solutions ranging from behavioral restrictions to breaking up companies. But most analysts believe the penalties will be mild, and historical precedents support that sentiment. According to The Wall Street Journal, antitrust lawsuits have not led to the collapse of a company in forty years. And the last time a judge tried to break up a major tech company, Microsoft in 2001, the decision was reversed by a federal appeals court.
Ackman may have reduced his position in Alphabet due to valuation concerns
Alphabet’s increased valuation is another plausible reason why Ackman trimmed his stake in the second quarter. The company had an average valuation of 25.8 times earnings during that period, peaking above 28 times earnings at the end of June. By comparison, the stock currently trades at 23.9 times earnings.
All told, Alphabet is more attractive today than it was in the second quarter, when Ackman sold shares. While regulatory concerns are far from resolved, Wall Street still expects Alphabet’s profits to rise 17% annually over the next three years. That makes the current valuation look quite reasonable.
These figures reflect a PEG ratio of 1.4, a slight deviation from the average value of 1.5 in the second quarter. It would not surprise me if Ackman were to buy Alphabet shares again. Either way, long-term investors should consider buying a small position in this popular AI stock today.
Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennevine has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
