Billionaire Bill Ackman runs Pershing Square Capital Management. He beat the S&P 500, which rose 99%, with a 212% return over five years ending in February 2024. That makes him an example for potential investors. Ackman split 37% of his $10.4 billion portfolio between two firms in the December quarter. His investments included 19% in Alphabet (NASDAQ: GOOGL) and 18% in Chipotle Mexican Grill (NYSE: CMG). That position size exudes confidence.
1. Alphabet Alphabet's fourth-quarter results beat top and bottom projections. Net revenues rose 13% to $86.3 billion, driven by cloud computing sales. GAAP net income rose 52% to $20.7 billion as cost reduction increased operating margin by 300 basis points. Investors should expect comparable sales growth in the following quarters, but slower profitability growth.
Alphabet subsidiary Google has a long-term advantage in internet data sourcing. The corporation owns 15 products with 500 million or more users and six with 2 billion or more. Google Search, YouTube, Android, and Chrome are examples.
Google dominates digital advertising because media buyers value its customer behavior knowledge. Statista reported 39% of digital ad spending went to the corporation last year. Google is strengthening its position by adding AI capabilities to its ad tech ecosystem, including generative AI to Google Search.
Alphabet has steadily increased cloud computing share due to product development and go-to-market efforts. Google Cloud Platform generated 11% of cloud infrastructure and platform services revenue in Q4, up 1% from the previous year. Google trails Amazon and Microsoft by a considerable amount, but Gemini may help it win market share.
The business claims Gemini outperforms GPT-4, the engine underlying ChatGPT Plus, on many benchmarks. Google Cloud users can construct conversational chatbots and intelligent search agents using Gemini. Gemini interacts with Google Workspace to automate Google Docs, Sheets, and Slides content creation, data synthesis, and picture generation.
Street expects Alphabet to grow sales by 10% annually over the next five years, but that could increase if the business retains its advertising and cloud computing market dominance. Digital advertising spending is predicted to climb 15% annually through 2030, and cloud computing income is expected to grow 14% annually.
Even with Wall Street consensus, the present valuation of 6.4 times sales seems realistic. Patient investors can buy this growing stock now, but I would size positions more conservatively than Bill Ackman.
2. Chipotle Even while many restaurants struggled in the fourth quarter, Chipotle did well. Fast-casual restaurant chain revenue rose 15% to $2.5 billion, operating margin 80 basis points to 14.4%, and non-GAAP net income 25% to $10.36 per diluted share. This was fueled by 8.4% same-store sales growth due to pricing power and 7.4% foot traffic growth.
These stats are impressive in context. The National Restaurant Association reported 1.1% same-store revenue growth in December and 1.7% consumer traffic reduction. Chipotle regularly attracts more customers as its competitors lose business. Chipotle's "food with integrity" strategy has built its brand authority.
To clarify, Chipotle uses only authentic ingredients (no preservatives or fake flavors) and sustainably raised meats (no hormones or antibiotics) and organic fruits. CEO Brian Niccol says the company values fresh food and doesn't use freezers, can openers, or microwaves. Its strategy has set Chipotle apart from other fast-food chains.
Unfortunately, not all excellent companies are good investments. Over the next five years, Wall Street expects Chipotle to raise EPS 20% annually. That consensus projection makes its 65 times earnings valuation seem high. Although investors in this company should expect to pay a premium, I would wait for a lower entry point before buying shares.
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