Bill Ackman is the founder and CEO of Pershing Square Capital Management, a hedge fund that has returned 22% annually over the past five years. In comparison, S&P 500 (^GSPC 0.16%) It provided an annual return of 16% during the same period. This outstanding performance makes Ackman a good case study for aspiring investors.

Ackman sold 2.2 million shares in the second quarter Alphabet (GOOGL 1.77%) (GOOG 1.66%)reduced its stake by 16%. More importantly, although Alphabet remained the largest position in Ackman’s portfolio, the decision to sell was still surprising given Wall Street’s persistently bullish trend.

Of the 67 analysts currently covering Alphabet, 79% rate the stock as a buy, while the remaining 21% rate it as a hold. No analysts are currently recommending a sell, and the same was true in the second quarter. Additionally, the average price target of $205 per share suggests a 23% upside from the current share price of $166.

Does Ackman know anything Wall Street is missing?

Alphabet has a strong position in advertising and cloud computing, powered by AI expertise

Alphabet is the parent company of Google, the largest digital advertiser by revenue and the third largest public cloud. The power of digital advertising is a product of high-traffic web properties like Google Search and YouTube; This allows the company to engage with users and source data at an unprecedented scale. These assets help advertisers put relevant marketing content in front of consumers online.

Meanwhile, the power of cloud computing is a product of technical expertise in fields 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, basic large language modelsand AI/ML platforms. Additionally, principal analyst Mike Gualtieri wrote: “Google is the best-positioned hyperscaler for AI.”

In summary, Alphabet has a strong competitive presence in two large and growing markets and is well positioned to benefit from the AI ​​boom. Looking ahead, eMarketer predicts digital ad spending will grow 10% annually through 2028, and IDC predicts spending on public cloud services will grow 19% annually over the same period, driven by strong demand for AI platform services. This bodes well for Alphabet and its shareholders.

So why? Bill Ackman Will it improve its position in Alphabet in the second quarter? We can only speculate about the answer. This may have been nothing more than profit-making, or perhaps he was worried about share price fluctuations due to an antitrust lawsuit. Alternatively, given that Alphabet shares rose 21% during the quarter, Ackman may be worried about valuation.

Ackman may have shortened his Alphabet position to limit volatility from an antitrust lawsuit

Bill Ackman’s reason for selling Alphabet may be to reduce volatility as an antitrust case reaches a critical stage. To elaborate, the Department of Justice sued Google in 2020 on the grounds that it created an illegal monopoly on internet search through exclusionary agreements that made competition with small companies nearly impossible.

Ackman knew a decision would come in the third quarter, so he may have reduced his stake in Alphabet in the second quarter to guard against a sharp decline. If that was his plan, it probably worked to some extent. Federal judge Amit Mehta ultimately ruled against Google, finding that the company had indeed acted illegally to maintain its dominance in internet search. The stock fell 22% between July and September.

More importantly, the Justice Department has proposed improvements ranging from behavioral restrictions to disbanding the company. But most analysts think punitive measures will be mild, and historical precedent supports this notion. According to The Wall Street Journal, antitrust lawsuits have not resulted in a company breakup in 40 years. And the last time a judge tried to break up a major tech company, Microsoft In 2001, the decision was overturned by a federal appeals court.

Ackman may have shortened Alphabet position due to valuation concerns

Alphabet’s rising valuation is another plausible reason why Ackman reduced its holdings in the second quarter. The company achieved an average of 25.8 times earnings during this period and rose to over 28 times towards the end of June. Comparatively, the stock currently trades at 23.9 times earnings.

All things considered, Alphabet is more attractive today than it was in the second quarter, when Ackman sold his shares. Although regulatory concerns are far from resolved, Wall Street expects Alphabet’s earnings to grow at an annual rate of 17% over the next three years. This makes the current valuation look quite reasonable.

Actually, these numbers give an idea. PEG ratio 1.4, a slight decrease from the second quarter’s average of 1.5. As a result, it wouldn’t surprise me if Ackman started buying Alphabet shares again. Either way, long-term investors should consider buying a small position in this popular AI stock today.