Key Points
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Bill Ackman’s Pershing Square Capital Management increased its stakes in Microsoft and Meta Platforms while disposing of all its Alphabet shares.
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Microsoft and Meta Platforms look poised to capitalize on AI over the long run, despite recent obstacles.
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Bill Ackman, the billionaire founder of the hedge fund Pershing Square Capital Management, was a busy man during the second quarter. He and his team made some notable moves. For instance, the firm surprisingly closed its position in Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). Why is this a surprise?
Alphabet has been performing extremely well in recent quarters, posting accelerating sales growth within its cloud computing segment, which is currently its most important growth driver.
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Perhaps Ackman decided to quit while he was ahead, or maybe there were other reasons for the decision. But it’s also interesting that the billionaire hedge fund manager doubled down on some major tech companies that have moved south over the past year, including Microsoft (NASDAQ:MSFT) and Meta Platforms (NASDAQ:META). Was this a good move?
Image source: The Motley Fool
1. Microsoft
Microsoft's shares have declined by 3% over the past 12 months. Investors worried about significant investments in the company's artificial intelligence (AI)-related ambitions. Many also feared that the very AI Microsoft is investing in could threaten the business, as AI applications could replace many of its services. However, the tech leader is proving the bears wrong. In the fourth quarter of its fiscal year 2026, which ended on June 30, Microsoft posted revenue of $90 billion, up 18% year over year.
The company's adjusted earnings per share rose 23% year over year to $4.74. What drove this strong performance? You guessed it, Microsoft's cloud computing business. And AI-powered tools and applications were a meaningful part of that. As the company noted, it has more than 100,000 customers who use Foundry, a platform that helps enterprises build, deploy, and manage domain-specific AI applications and agents.
According to management, revenue from Foundry more than doubled year over year during its latest quarter. This points to an important phenomenon: Microsoft isn't being replaced by AI. It is improving its services with AI, and its clients are buying what it sells. Meanwhile, the company still has plenty of runway for growth, even beyond the $678 billion in cloud backlog it recorded during its fourth quarter, which grew 84% year over year.
Microsoft is a leader in cloud computing, a market with massive remaining white space. It boasts a wide moat thanks to switching costs and the deep relationships it has built with enterprises over the past few decades, and it generates ample cash flow that will enable it to innovate and stay ahead of the ongoing AI revolution. For all those reasons, the stock is a buy. I'd follow Ackman's lead on this one.
Meta Platforms is also spending a lot on its AI-related ambitions. That's why during the second quarter, the company's EPS and free cash flow decreased. However, the tech giant is facing an even bigger problem. Meta Platforms is dealing with lawsuits over its allegedly addictive social media platforms and the harm they have caused users, especially younger ones. This could hang over the company's head for a long time and affect its stock market performance. Yet, in the midst of all that, Pershing Square Capital Management increased its stake in Meta Platforms. That may not be as bad a move as it seems at first.
After all, one of Meta Platforms' greatest strengths is its vast user ecosystem. The company ended the second quarter with 3.6 billion daily active users across its websites and apps, an increase of 3% year over year. So long as it avoids losing a large number of them while finding better ways to monetize its ecosystem, Meta should post strong financial results. AI is helping it do both of those things. The company's AI-powered algorithms have improved engagement across its platforms and led to increased ad revenue. Meta Platforms is betting that it can do even more.
CEO Mark Zuckerberg is looking to build highly personalized AI agents for everyone. Imagine having an AI assistant in your corner that isn't just a generic AI tool, but knows your likes, dislikes, personality, etc., and can autonomously act to help you achieve your goals. If Meta can launch these personalized agents for a large number of its users, it could see significantly greater engagement as people interact with these agents and reveal more about themselves, leading to more tailored recommendations across its platforms.
That's not the only monetization opportunity Meta Platforms is looking at. The company is reportedly considering renting out excess AI computing capacity, which, as management noted, it may do at a significant premium over what it paid for it. In my view, these are highly attractive long-term opportunities that justify Meta's investments. And even if they don't pay off as much as the company thinks, it could quickly cut the spending and boost profits and margins, as it did several years ago when it reached limited success with its expensive metaverse ambitions.
But what about the company's lawsuits? Meta Platforms has previously overcome legal problems that affected its public image. Investors should keep an eye on these lawsuits, but Meta's long-term prospects remain strong despite that risk.
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Prosper Junior Bakiny has positions in Alphabet and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Microsoft. The Motley Fool has a disclosure policy.
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