Warren Buffett assumed control of Berkshire Hathaway in 1965. He quickly diversified beyond the core textile business to build a holding company that now owns dozens of subsidiaries. Berkshire shares have returned 20% annually under his leadership.
Billionaire Bill Ackman wants to recreate that success with Howard Hughes Holdings. He explained his plan to create a "modern Berkshire Hathaway" at the annual shareholder meeting earlier this year. Whether Ackman realizes that ambitious goal and becomes the next Warren Buffett remains to be seen, but he has a good track record.
His hedge fund, Pershing Square, beat the S&P 500 (^GSPC 0.41%) by 24 points over the last decade. That makes Ackman a good source of inspiration, and as of the third quarter, 39% of his portfolio was split between two artificial intelligence (AI) stocks: 19% in Alphabet (GOOGL 0.59%) (GOOG 0.93%) and 20% in Uber Technologies (UBER 1.53%).
Here's what investors should know.
Image source: Getty Images.
1. Alphabet: 19% of Bill Ackman's portfolio
Alphabet is the largest ad tech company in the world due to its ability to engage internet users with popular web properties YouTube and Google Search. Search advertising alone accounts for half of revenue, so investors have been wary about potential disruptions from artificial intelligence (AI) tools like Perplexity and ChatGPT.
However, Alphabet has adapted to the era of generative AI by retooling Google Search with AI Overviews and AI Mode, features that have led to an increase in commercial and overall queries. CEO Sundar Pichai says the impact has been particularly strong among younger people, which suggests the company can retain its search dominance even as the industry undergoes radical change.
Meanwhile, Google Cloud revenue has accelerated in two straight quarters, due primarily to demand for artificial intelligence services. The company has designed custom AI chips called Tensor Processing Units (TPUs), which provide an alternative to Nvidia GPUs, and it has developed the Gemini family of large language models, whose popularity rivals that of models from OpenAI and Anthropic.
In a recent note to clients, Morningstar analyst Malik Ahmed Khan said Alphabet was the only company with leading-edge AI solutions that span infrastructure (i.e., TPUs and cloud services) to consumer distribution (i.e., Google Search and Gemini). He also said the news that Meta Platforms may deploy Google TPUs in its data centers was a significant milestone, as TPUs have never been used outside Google Cloud.
Here's the big picture: Alphabet has a strong presence in two markets, digital advertising and cloud computing, and it's leaning on artificial intelligence across both business segments. Wall Street expects earnings to increase at 16% annually over the next three years, which makes the current valuation of 32 times earnings look reasonable. Investors should feel comfortable buying a small position today.
NASDAQ: GOOGL
Key Data Points
2. Uber: 20% of Bill Ackman's portfolio
Uber operates the largest ride-sharing platform and one of the largest delivery platforms in the world, which has benefited from its recent push into grocery and retail. Offering those services through a single mobile app lets the company efficiently cross-sell users on each side of the ecosystem. The company has also used its consumer data to build a sizable ad business.
Looking ahead, Uber estimates autonomous vehicles (AV) will push the U.S. ride-sharing market to $1 trillion. It has partnered with 20 companies to capitalize on that opportunity. Among the most important partnerships, Alphabet's Waymo offers robotaxis in Atlanta, Austin, and Phoenix; and WeRide provides robotaxis in Abu Dhabi, with 15 European cities to follow in the next five years.
Uber has also partnered with Nvidia to advance its position in autonomous driving in two ways. First, the Nvidia Hyperion framework comprises hardware and software that other companies can use to build and deploy robotaxis on Uber; the goal is 100,000 vehicles by 2027. Second, Uber will collect more than 3 million hours of robotaxi-specific data using Nvidia hardware and software as the companies collaborate on a data factory.
Uber CEO Dara Khosrowshahi earlier this year said, "Uber can deliver the lowest operation costs of our AV partners because we are leaps and bounds ahead on every aspect of the go-to-market capabilities that are critical to commercialization." Put differently, Uber has the largest ride-sharing platform in the world, which makes it an the ideal partner for AV companies that want to monetize robotaxis.
Wall Street expects Uber's earnings to increase at 31% annually over the next three years. That makes the current valuation of 11 times earnings look quite cheap. Like Bill Ackman, patient investors should feel comfortable owning a position in this growth stock.
