Billionaire Bill Ackman Built a $2.1 Billion Stake in Microsoft After the Stock Slid. Is It Still a Buy?

Billionaire hedge fund manager Bill Ackman, founder of Pershing Square Capital Management, made a big bet earlier this year on "Magnificent Seven" stock Microsoft (NASDAQ: MSFT).

In the first-quarter 13F filing, released in May, Pershing Square revealed it bought 5.7 million shares of Microsoft stock at a value of $2.1 billion. The tech giant immediately became Ackman's fourth-largest holding, making up 15.2% of the portfolio.

The purchase came when Microsoft stock was trading at a price-to-earnings (P/E) ratio of 21, the lowest it had been since 2017 and some 32% below Microsoft's average P/E ratio of 31.

At that valuation, getting a powerhouse stock like Microsoft was a no-brainer.

Pershing Square Capital Management founder Bill Ackman. Image source: Getty Images.

In mid-2017, Microsoft was trading at about $75 per share. Over the next four years, the stock price surged some 300% to over $300 per share by October 2021.

The value was not lost on Ackman.

"In our 13F which we will file later today, we will disclose a new position in Microsoft, a company we have followed for many years now offered at a highly compelling valuation," Ackman wrote in an X post on May 15. "Microsoft operates two of the most valuable franchises in enterprise technology, which account for approximately 70% of the company's overall profits: M365 and Azure."

Microsoft stock goes parabolic

Since Microsoft reported earnings on July 29, its stock has gone parabolic, as I predicted a few weeks ago. In the past few days, Microsoft stock has gone from $390 per share on July 29 to $488 per share on Aug. 5 -- a 25% jump.

As of the end of June, Microsoft stock had been down about 23% year to date, trading at around $373 per share. The reason the stock was down was mainly due to concerns about too much spending on AI, the potential for AI disruption, and slightly slowing cloud growth, among other factors. In addition, some investors were worried about Microsoft's exclusive partnership with OpenAI, given concerns about OpenAI's profitability.

But those concerns were soon alleviated as Microsoft showed cloud growth in the March-ended quarter and reworked its deal with OpenAI so that it was no longer exclusive. Based on management's projections for accelerating cloud growth in the second half of the year, it seemed that the AI spending was starting to pay off.

These trends continued when the fiscal Q4 earnings were released on July 29. Revenue rose 18% and earnings climbed 32% in the period ended June 30, crushing estimates. Further, Azure cloud revenue blasted past estimates, rising 43%, compared to 40% the previous quarter.

For the current quarter, its fiscal Q1, Microsoft sees 45% growth in its Azure cloud business, showing that the spending on AI infrastructure is providing capacity for growth.

Even after the big jump, Microsoft has more room to run. It's still trading below its average at around 25 times earnings, so it remains a great call by Ackman and a good buy.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.