Last quarter, Bill Ackman's hedge fund, Pershing Square, owned zero shares of Microsoft (MSFT 4.13%). This quarter, however, Ackman disclosed a 5,654,078-share stake comprising more than 14% of Pershing's entire portfolio. That stake is currently valued at roughly $2.1 billion. Pershing runs a fairly concentrated portfolio, but within a single quarter, Microsoft has become its fifth-biggest position.
Why is Ackman loading up on Microsoft stock? One clue gives us a potential answer.
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Here's why Bill Ackman is loading up on Microsoft stock
The easiest explanation for Ackman's trading activities is that he wants to increase his bet on artificial intelligence stocks. Microsoft is now one of the biggest AI companies in the world, with heavy exposure to both AI software and the data centers that power this revolutionary technology. Indeed, other stocks in Ackman's portfolio, including Meta Platforms and Uber Technologies, are similarly exposed to AI tailwinds.
There's just one problem with that explanation: Last quarter, Ackman also heavily sold an AI stock very similar to Microsoft. That stock was the parent company to Google and Waymo: Alphabet. Last quarter, Pershing Square sold more than 6 million shares of Alphabet, creating the cash necessary for the Microsoft stake to be purchased.
Image source: Getty Images.
So it seems that Pershing's portfolio isn't more exposed to AI following the combined trades. Then what prompted the move? It looks like the trades were simply a reflection of each company's relative valuation. Over the last six months, Alphabet stock has risen by nearly 30%, while Microsoft shares are down by roughly 10%.
According to Reuters, Ackman believes that Microsoft stock is trading at a "highly compelling valuation" following the correction. "Ackman's stake aligns with our view that Microsoft has scope to rerate from current levels," one analyst told Reuters. "Shares are trading at one of the lowest levels seen in the past decade. We do not think that's justified."
Indeed, Alphabet stock now trades at 11.1 times sales, while Microsoft shares trade at just 9.8 times sales. That's not a huge discount, but it's still a relative gap of more than 10%. Ackman clearly did not want to reduce his exposure to AI in general. Rotating his capital between Alphabet and Microsoft -- whichever stock is cheaper at the time -- allows him to essentially maintain his core bet while reducing the valuation his fund needs to pay for that exposure.
