Bill Ackman talks IPOs, SpaceX and favourite tech stocks

Not long after Pershing Square Inc (NYSE:PS)’s IPO in New York, we caught up with Bill Ackman to discuss his latest deals, what he thinks of Space Exploration Technologies Corp Class A (NASDAQ:SPCX), the tech sector, valuations and the latest hot stocks. 

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00:00 - A brief overview of Pershing Square’s investment strategy and current portfolio. 
00:51 - The Pershing Square New York IPO 
02:34 - Out of all the great tech stocks, why did you invest in Microsoft? 
05:09 - Why don’t you invest in other big tech names like NVIDIA, Apple and Tesla? 
06:32 - AI valuations, overspending on AI and how massive investment is being funded 
08:16 - What about Micron Technology and other ‘hot’ stocks? 
10:17 - SpaceX and thoughts on the boom in space sector investments 
12:34 - Which stocks in your portfolio would you hold forever?

Lee Wild: Today I have with me Bill Ackman, founder and chief executive of Pershing Square. Hi Bill, thanks for joining us again. Good to see you.

Bill Ackman, founder and chief executive of Pershing Square: Thanks for having me.

Lee Wild: Could you give our viewers a brief overview of your investment strategy and your overall view of the Pershing Square portfolio at the moment?

Bill Ackman: So, our strategy is to construct a portfolio of the best durable growth companies in the world, acquire them at attractive prices and be a long-term investor.

The typical portfolio is a dozen or so of the highest-quality businesses in the world. And we look for cases, our first choice is a business [that] meets our business quality and growth characteristics trading at a deep discount, where the management’s already doing everything right. And our second choice is a company that meets all of our criteria where management’s not doing everything right, where we can be helpful to the company.

Lee Wild: You recently IPO’d Pershing Square in New York, raising $5 billion. Are you happy with how things went and how things have gone since?

Bill Ackman: So, I would say happy with the IPO. It was the largest closed-end IPO ever, I would say. It’s certainly a good place to start, but disappointed with the trading price. I thought we could accomplish the objective of a closed-end fund trading at or around NAV and we’re out of the gates trading at a significant discount, about an 18% discount to NAV.

We can attribute that to short-term technical factors, but the long term will kind of speak. We have not yet disclosed the portfolio, but it is actually relevant for Pershing Square Holdings Ord (LSE:PSH) We have four out of the dozen names in the portfolio. We have four new names. We also have four new names in Pershing Square Holding because we do intend to keep the portfolios substantially similar.

Lee Wild: So, the money has been deployed, or is about to be deployed?

Bill Ackman: So, we’ve deployed about 84% of the capital and we’ve done so in what we think of as a very attractive market environment.

Lee Wild: There’s the oft-repeated ambition to become a Warren Buffett-style investment firm, is that still on the cards?

Bill Ackman: Well, I think we have some of the attributes of Mr Buffett’s approach in that [we have] a concentrated collection of investments, very, very high-quality businesses. I always say our portfolio offers substantially more long-term growth and higher returns on capital than the typical Berkshire portfolio, but a lot of the Buffett principles are things that we apply. And so more directly in that reference is really more towards our stake in Howard Hughes Holdings Inc (NYSE:HHH), a company we’re kind of transitioning into, more of a Berkshire Hathaway-type business model.

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Lee Wild: I’d like to talk about the technology sector. You own significant stakes in Amazon.com Inc (NASDAQ:AMZN), Meta Platforms Inc Class A (NASDAQ:META), and now Microsoft Corp (NASDAQ:MSFT). Alphabet Inc Class C (NASDAQ:GOOG) was a very profitable call, but you sold it to pay for Microsoft. Out of all the great tech stocks, why Microsoft? 

Bill Ackman: Microsoft has, we believe, a very difficult to disrupt position in kind of the enterprise software business. You think of the Microsoft 365 package, which is very pervasive, 450 million users, very low cost per seat product. But, you know, the base package is about $20 a customer. With that, you get a collection of software that would be impossible to replace each of the various components with a third-party seller at even more than twice the price.

So, it’s a very attractive, low-cost set of enterprise products. And that’s kind of the base offering. Then on top of that, Microsoft enables a safe way to have your employees enter the AI age with Microsoft Copilot and the ability to access other models and do so in a manner which doesn’t put the company enterprise at risk because you’ve got an employee burning up tokens and you wake up one day and you’re bankrupt because of all the money you owe to Anthropic.

Microsoft also brings a suite of protections in the cybersecurity landscape, which is really important. You know, there’s been a big sell-off in software as a service companies, and it’s been pervasive without any real differentiation among the various players. 

And we think Microsoft, because of its market position, is going to continue to be able to compound its earnings at very high rates - and that’s just the software part of the business. The other 60% or so of the company is their Azure cloud business, which is absolutely booming as a result of the demand for compute.

So, the number two player in that space, that’s a business growing in the very rapid high 30s-type compounded rate, and a huge beneficiary of AI. Microsoft’s trading at the lowest valuation, 21 times earnings, that it’s traded at in at least a decade and even historically one of the lowest valuations ever. So, a relatively high-growth company compounding revenues at 15%, earnings at something approaching 20% per annum, where we think AI is a boost to the business.

Lee Wild: There are clear reasons why you’d invest in Microsoft and the three tech companies that you own. I guess viewers would be just as curious to understand why you don’t invest in some of the other big tech names that we hear a lot about - NVIDIA Corp (NASDAQ:NVDA), Apple Inc (NASDAQ:AAPL), Tesla Inc (NASDAQ:TSLA). Have any of those been on your radar at any point and why might they not be considered perhaps? 

Bill Ackman: Every business today is a tech company. Some seem predominantly more so than others. I have enormous respect for Elon. It’s more a question of price and market position.

I drive a Tesla, it’s a great car, but it’s a very competitive space. To own Tesla at today’s valuations, you have to make some pretty grand assumptions about robotics and other things that they’re going to achieve over time. 

We prefer to invest in businesses which we can predict with a much higher degree of confidence. I put Microsoft in that category more so than the other names that you mentioned, and price. It’s combination of price, predictability. 

Our portfolio is comprised of businesses where we, to a very high degree of confidence, can predict the cash flows over a very long period of time. I think it’s very hard to do that with Tesla and even Nvidia, even though these are wonderful businesses.

Lee Wild: Sticking with tech, do you have a view, I’m sure you will have a view, on AI valuations, overspending on AI and how massive investment is being funded? I guess the fear, especially perhaps at the moment, is could the house of cards collapse, or should investors feel secure?

Bill Ackman: I don’t think it’s a house of cards. We saw a massive investment - history rhymes, but doesn’t repeat, they say - 25 or so years ago, 26 or so years ago, there was massive investment in internet companies and associated with that was huge spending when people were buying a lot of hardware and routers and things like this and Cisco Systems Inc (NASDAQ:CSCO) was trading at a massive valuation.

Here, the investment is in quote unquote compute, where I think it’s a near certainty that there is going to be approaching infinite demand for processing power, memory. Very high returns will be earned on that compute.

If you read the SpaceX prospectus in some of the more recent announcements, Elon basically sublet his compute to Anthropic and Google and others at prices enabling a very short-term recovery of investment in these data centres. I think the investment in data centres makes a lot of sense.

Whereas who’s going to win the LLM frontier model race is a much more complicated question. It seems to me there’s more…people are looking for a bubble. I think there’s more risk of a bubble in the private markets than the public markets. 

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Lee Wild: We’ve got hot stocks like Micron Technology Inc (NASDAQ:MU) and Strategy Inc Class A (NASDAQ:MSTR), the latter’s more sort of a crypto play. So, broadly across the tech sector, we’ve seen some of these spikes, and we’ve seen these very rapid rallies as people jump on board. What would stop you from jumping into this type of hot play? Those potential short-term gains, I guess, aren’t where you’re interested?

Bill Ackman: Again, the value of financial assets is the present value that a business generates over its life. Most of the cash a business generates is reinvested in the business. The investor doesn’t get to see it. So, your outcome really depends on kind of long-term residual value. 

One way to think about it is if the stock market might close tomorrow for a decade. We’re looking to own the business that five years from now, 10 years from now, we’re very happy to be a shareholder of this company because we’ve earned a 20%-plus compounded return.

We’re not trying to pick the stock that’s going to go up the most in the next three months. That’s a little bit more of a game. Micron’s an interesting company, an enormous demand, finite supply, living off a dry price, very, very aggressively that’s led to a massive increase in their earnings, and the markets responded to that.

I think it’s difficult to predict how prolonged this period of massive demand and limited supply continues for, and what they’re going to do with all that cash. They’re likely to reinvest all that cash in more manufacturing capacity.

The history of the chip companies is one of enormous volatility as they go from periods of mismatches between when there’s too much demand and limited supply to times where there’s too much supply and limited demand. We prefer a business that we can predict with a much higher degree of confidence, and that’s why we don’t own a Micron. 

Lee Wild: We’ve just had the SpaceX IPO. Is that something that interested you at all? 

Bill Ackman: I’m a big Elon fan, but a bit like some of the other names we’ve spoken about it…I love Starlink, it’s an incredible product. SpaceX has a near monopoly position in low-cost launch. AI? I would say they’re further behind, but no one’s better at building things and data centres and hardware.

I think Colossus was their data centre. Built faster at lower cost than anyone else. So, he’s got some amazing competitive advantages. We’re looking to earn higher rates of return over time. A starting valuation of $1 trillion/$750 billion, compounding at 20% per annum, gets you to a pretty remarkable place over a long period of time.

That puts it in a category where I would say it’s too difficult to predict for us. The person who puts 1% of their portfolio in SpaceX does a very different analysis on risk and reward than a cost-trade investor that wants to put 10% or 15% of their capital in an investment. That’s the challenge for us on SpaceX.

Lee Wild: Do you have similar thoughts on the boom in the space sector investments overall? Built to last or flash in the pan, that sort of thing? We’ve seen a lot of interest in some of the UK trusts and assets over here, space-linked assets. Are you sort of discounting ever investing in the space sector or might it interest you at a later date, do you think?

Bill Ackman: There’s a long history of markets getting excited about the new new thing. Space is the, again, new frontier. It’s very exciting for everyone. There’s a space company that you can own today where anyone realistically can predict what the cash flows are going to be from the business for the next three years, let alone the next 20.

Our business model is owning businesses where we can predict the future. Actually, those businesses today are available, the very high-quality durable compounders, where you can actually have a pretty high confidence level in the cash flows they’re going to generate over time, and in a sector of the market where people are withdrawing capital from. So, they’re about the cheapest that they’ve been in a long time. And that’s the[set-up] in the market that we find most interesting. 

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Lee Wild: The Pershing Square portfolio typically has maybe a dozen companies, maybe less, maybe more, but out of those companies, are there stocks that you would own forever in a Buffett-like sort of approach or is everything up for sale at some point? 

Bill Ackman: The only holding that we’ve said is effectively a forever holding is our stake in Howard Hughes because Howard Hughes is effectively itself becoming an investment vehicle. And so we can deploy the capital of the business over time. So, it’s just another vehicle for us to make investments.

Everything else is liquid security that we can make a decision about buying or selling on a daily basis. One of the methodologies we use to decide what we want to own is: is this a business, if the stock market shut for 20 years, that we’d be happy to own? And I think that’s the case for the portfolio we’ve constructed.

Whereas a lot of the investments being made in, for example, some of the industries and categories we’ve talked about, I would say very few people would invest if you literally had to own them for 20 years because of their very high degree of unpredictability.

A lot of people invest in the stock market buying things on the hope they can sell them to someone else in a relatively short period of time at a premium. We never really make an investment on the bet that someone else will buy from us. We make an investment in a company that sort of on its own can justify its valuation. 

Lee Wild: Bill Ackman, founder and chief executive of Pershing Square, thanks ever so much for joining us today. 

Bill Ackman: Thanks for having me.

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