Bill Ackman has made several investments over the last few years to take advantage of massive opportunities in artificial intelligence (AI). He bought Alphabet in his hedge fund, Pershing Square Capital, in 2023, when many viewed it as a net loser from the rise of AI chatbots like ChatGPT. He also bought Amazon last year amid a brief market sell-off, recognizing its strong position in cloud computing and AI. So far, his AI investments have paid off well, beating the S&P 500.
His most recent AI stock purchase is already up 1,650% since its IPO, but Ackman sees plenty of room for the stock to keep climbing. In the meantime, he fully exited a stock Pershing Square has held since 2018: Hilton Worldwide (NYSE: HLT).
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Bill Ackman initially bought Hilton stock in 2018, adding to it about 18 months later near the start of the COVID-19 pandemic. The company’s portfolio caters to a wide range of travelers and includes several very strong brands with high customer loyalty. In fact, Hilton has increased its loyalty membership to 243 million, up from 85 million when Ackman initially bought shares.
Over the last seven years, Hilton has reduced its corporate overhead, with the largest increase in expenses driven by expanding its franchises and locations. The company now counts over 1.3 million rooms across its portfolio, up from 913,000 at the end of 2018. As a result, its adjusted EBITDA has soared from $2.1 billion to $3.7 billion over the last seven years.
There’s still a lot of growth yet to come, too. Management said it has a pipeline of 520,500 rooms, and it expects a rebound in revenue per available room growth to between 1% and 2%. Overall, EBITDA should surpass $4 billion this year.
But the stock has climbed even faster than the financial results. The stock price is up more than 350% since the end of 2018. Its enterprise value (EV) has tripled, putting its EV-to-EBITDA ratio close to 21.5 based on management’s outlook. Its forward price-to-earnings (P/E) ratio of 36 is also quite high, suggesting future stock returns might not match those of the last few years. It makes sense for Ackman to take the gains and look for better opportunities with higher potential returns.
Pershing Square said it completely exited its position in Hilton earlier this year during its annual presentation to shareholders.
Ackman revealed Pershing Square’s latest AI stock purchase at its annual presentation: Meta Platforms (NASDAQ: META). Ackman noted, “Meta’s business model is one of the clearest beneficiaries of AI integration.”
He believes the weakness in the stock related to investor fears about overspending on AI infrastructure and personnel is an opportunity for long-term investors. He points out that the forward P/E of the stock now sits around 22, and if you remove Reality Labs, its augmented reality business, the core advertising business trades for just 18 times earnings. That’s an incredible bargain considering the company’s growth outlook.
That growth is being fueled by its advances in AI, which could support Pershing Square’s medium-term outlook for 20% annualized earnings-per-share growth. AI is at the core of Meta’s recommendation algorithm, which has helped increase engagement across Facebook and Instagram. That’s enabled it to show more ads, with ad impressions climbing 18% in the fourth quarter. Just as importantly, its algorithms help target ads and make them more effective, leading to a 6% increase in average ad pricing last quarter.
The potential for generative AI to expand its customer base for advertising is huge. Not only could it lower the barrier to entry for advertising on Facebook and Instagram, it could also open new avenues for advertising such as chatbots in Messenger and WhatsApp. Meta may also explore advertising in its own Meta AI chatbot (its answer to ChatGPT) built into all of its apps.
Of course, improving and scaling the use of AI products comes at a significant cost. Meta told Wall Street it’ll spend between $115 billion and $135 billion on capital expenditures this year. That’s a 73% jump from last year at the midpoint. Ackman argues that Meta’s upside potential from AI supports front-loading its infrastructure costs, and that the overbuilding risk is mitigated by the core businesses’ ability to grow into excess capacity. Additionally, it sports a balance sheet strong enough to support the buildout.
At 22 times forward earnings, the current price still presents a very attractive entry point for the stellar AI stock.
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Adam Levy has positions in Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, and Meta Platforms. The Motley Fool has a disclosure policy.
Billionaire Bill Ackman Sold Hilton Worldwide And Bought This Artificial Intelligence (AI) Stock Up 1,650% Since Its IPO was originally published by The Motley Fool
