Bill Ackman: belief

Transcript context

…So it’s interesting that you think that maybe Alphabet fits some of these characteristics. It’s tricky to know with everything that’s happening in AI… And I’m interviewing Sundar Pichai soon. It’s interesting that you think that there’s a moat. And it’s also interesting to analyze it because as a consumer, as just a fan of technology, why is Google still around? It’s not just a search engine, it’s doing all the basics of the business of search really well, but they’re doing all these other stuff. So what’s your analysis of Alphabet? Why are you still positive about it? Sure. So it’s a business we’ve admired as a firm for, whatever, 15 years, but rarely got to a price that we felt we could own it. Because again, the expectations were so high and price really matters. Really the sort of AI scare, I would call it… Microsoft comes out with ChatGPT, they do an amazing demonstration. People like this most incredible product. And Google, which had been working on AI even earlier, obviously… The Microsoft was behind in AI. It was really their ChatGPT deal that gave them a market presence. And then Google does this fairly disastrous demonstration of Bard and the world says, “Oh my god, Google’s fallen behind in AI. AI is the future.” Stock gets crushed. Google gets to a price around 15 times earnings, which for a business of this quality is an extremely, extremely low price. And our view on Google… One way to think about it, when a business becomes a verb, that’s usually pretty good sign about the moat around the business. So you’d open your computer and you open your search and very high percentage of the world starts with a Google page in one line where you type in your search. The Google advertising, search, YouTube franchise is one of the most dominant franchises in the world. Very difficult to disrupt, extremely profitable. The world is moving from offline advertising to online advertising. And that trend, I think, continues. Why? Because you can actually see whether your ads work. They used to say about advertising, “You spend a fortune and you just don’t know which 50% of it works, but you just sort of spend the money because you know ultimately that’s going to bring in the customer.” And now with online advertising, you can see with granularity which dollars I’m spending… When people click on the search term and end up buying something and I pay, it’s a very high return on investment for the advertiser and they really dominate that business. Now, AI, of course, is a risk. If all of a sudden people start searching or asking questions of ChatGPT and don’t start with the Google search bar, that’s a risk to the company. And so our view, based on work we had done and talked to industry experts, is that Google, by virtue of the investment they’ve made the time, the energy that people put into it, we felt their AI capabilities were, if anything, potentially greater than Microsoft ChatGPT and that the market had overreacted. And because Google is a big company, global business regulators scrutinized it incredibly carefully. They couldn’t take some of the same liberties a startup like OpenAI did in releasing a product. And I think Google took a more cautious approach in releasing an early version of Bard in terms of its capabilities. And that led the world to believe that they were behind. id in releasing a product. And I think Google took a more cautious approach in releasing an early version of Bard in terms of its capabilities. And that led the world to believe that they were behind. And we ultimately concluded, if anything, they’re tied or ahead and you’re paying nothing for that potential business. And they also have huge advantages by virtue… If you think of all the data Google has, the search data, all the various applications, email and otherwise, and the Google suite of products, it’s an incredible data set. So they have more training data than pretty much any company in the world. They have incredible engineers, they have enormous financial resources. So that was kind of the bet. And we still think it’s probably the cheapest of the big seven companies in terms of the price you’re paying for the business relative to its current earnings. It also is a business that has a lot of potential for efficiency. Sometimes when you have this enormously profitable dominant company… All of the technology companies in the post March ’20 world grew enormously in terms of their teams and they probably overhired. And so you’ve seen the Facebooks of the world and now even Google starting to get a little more efficient in terms of their operation. So we paid a low multiple for the business. One way to think about the value of the business is the price you pay for the earnings or alternatively what’s the yield? If you flip over the price over the earnings, it gives you kind of the yield of the business. So a 15 multiple is about almost a seven and a half percent yield. And that earnings yield is growing over time as the business grows. Compare it to what you can earn lending your money to the government, 4%, that’s a very attractive going in yield. And then there’s all kinds of, what we call, optionality in all the various businesses and investments they’ve made that are losing money. They’ve got a cloud business that’s growing very rapidly, but they’re investing basically a hundred percent of the profits from that business and growth. So you’re in that earnings number, you’re not seeing any earnings from the cloud business, and they’re one of the top cloud players. So very interesting, generally well-managed company with incredible assets and resources and dominance, and it has no debt. It’s got a ton of cash. And so pretty good story.…

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