Alphabet Inc. (NASDAQ: GOOG), with its impressive financial performance and strong market positioning, remains a compelling buy, largely due to its robust free cash flow generation. Bill Ackman of Pershing Square Capital Management holds a substantial stake in Alphabet, highlighting its significance in his portfolio, second only to Restaurant Brands International.
Through the first quarter of 2024, Alphabet reported a trailing twelve-month free cash flow of $69.11 billion, equating to 21.7% of its $318.15 billion revenue. This performance starkly contrasts with the combined free cash flow margins of Pershing’s other holdings, which collectively manage less than half of Alphabet’s margin when excluding outlier Howard Hughes.
The strategic reduction of Pershing’s stake in Lowe’s suggests a possible reallocation towards more lucrative investments like Alphabet, given its stronger free cash flow generation. Despite cutting its Lowe’s position significantly in late 2023, Alphabet’s continued cash flow strength makes it a foundational asset within Pershing’s strategy.
Looking across the technology sector, Alphabet competes strongly within the elite group of stocks known as the Magnificent 7, which includes other major players like Apple, Microsoft, and Amazon. Among 64 analysts covering Alphabet, 78% recommend buying the stock, with a consensus target price suggesting a 14% upside potential. This buy sentiment, however, trails Microsoft’s 95% and Amazon’s 97%, underscoring a highly competitive landscape.
Alphabet’s free cash flow margin exceeds most of its Mag 7 counterparts, with the exception of Microsoft, which boasts a higher margin of 29.8%. This comparison emphasizes Microsoft’s operational efficiency and market leadership under CEO Satya Nadella, whose tenure has seen the stock rise by over 1020% since 2014.
In conclusion, while Alphabet demonstrates substantial financial health and investor confidence, its comparison within the Mag 7 shows it as a strong contender, though not the leader. The debate on investment allocation within Alphabet, particularly regarding buybacks versus reinvestment in business operations, remains pertinent as it continues to navigate shareholder expectations and employee compensation concerns.