Bill Ackman’s Pershing Square Capital Management Sold Alphabet and Bought These 2 Beaten-Down Stocks

In investing, as in other aspects of life, it makes sense to take lessons from those who have been successful. One such person is Bill Ackman, the founder and CEO of Pershing Square Capital Management, a hedge fund that has produced excellent returns over the past couple of decades. During the second quarter, Ackman and his investing team made a move that probably took some investors by surprise: They closed their position in Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), a tech leader that seems to be firing on all cylinders.

What's more, Ackman bought more shares of Meta Platforms (NASDAQ:META), while initiating a position in Netflix (NASDAQ:NFLX), both of which have significantly lagged broader equities over the trailing-12-month period. The Alphabet move aside, Ackman's decision to go against the grain by investing in Meta and Netflix during the second quarter may have been a great move. Here is why.

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1. Meta Platforms

In the second quarter, Meta Platforms' revenue grew by a healthy 28% year over year to $60.8 billion. However, the company's earnings per share (EPS) dropped 13% year over year to $6.18, and its free cash flow came in at $784 million, significantly down from the $8.5 billion reported in the year-ago period. Meta's hefty artificial intelligence (AI)-related investments are helping improve its ad business, but they are weighing on margins and profits, at least for now, and that's spooking some investors. Further, Meta is facing lawsuits over social media harm.

These factors explain why the stock has underperformed broader equities lately. That said, Meta's prospects are much stronger than its recent stock market performance suggests. Consider the company's AI strategy. Meta is betting that personalized AI agents that can help people get things done and reach goals faster are the future. It recently launched the first such agent, Muse. Given Meta's deep ecosystem of 3.6 billion daily active people, significant traction for its AI agents could boost engagement across the company's platforms.

Meta has other potential growth avenues, including selling excess AI computing capacity, a business with strong current demand. On the legal front, Meta recently reached an agreement to settle many of its social media harm lawsuits for a rather modest amount, considering how much money it makes. So, despite recent struggles, the stock remains a great long-term pick.

2. Netflix

Netflix's business has matured, and the company now faces more competition than it once did. As a result, engagement on its platform is no longer as strong, while its financial results have been unimpressive. Can Netflix bounce back? One thing to note is that there is still a massive addressable market across streaming and advertising. Cable isn't dead, far from it, but the cord-cutting trend should continue over the long run.

As more people switch to streaming, Netflix remains well-positioned to benefit. Also, Netflix has encountered somewhat similar problems before. Growing competition and lower-than-expected engagement are nothing new. In the past, it has found ways to get things back on track. Could Netflix do so again? According to reports, the company is considering granting its users access to other streaming platforms through its app.

If it does so, Netflix would become more of a streaming hub where viewers can switch across multiple streaming leaders. Netflix, which has the highest number of paying subscribers in the industry, would charge its competitors for this privilege, adding a high-margin revenue stream to the company's portfolio. This move could also strengthen Netflix's ad business by boosting engagement on its platform and improving its data flywheel, which informs its content production strategy.

There is no official confirmation that Netflix is going this route yet (as of writing), but the broader point is that the company's massive ecosystem and moat stemming from its brand name and data flywheel -- coupled with the large remaining opportunities in the industry -- paint a brighter picture for the future than recent performance suggests. In my view, the stock is a buy.

Prosper Junior Bakiny has positions in Alphabet and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Netflix. The Motley Fool has a disclosure policy.