Billionaire Bill Ackman Sold a Long-Time Holding to Make Room for These 2 New Artificial Intelligence (AI) Stocks

Bill Ackman's investment strategy is relatively simple. Buy stocks of well-run companies with good earnings growth potential at prices below their estimated intrinsic value. Then wait for the market to realize it's been undervaluing the business. That's the same strategy followed by many successful investors, including Warren Buffett, and it typically involves holding stocks for long periods.

But occasionally an investment runs its course. The market catches up to a business's continued success, and eventually it starts to overvalue the stock. That can cause expected future returns from the holding to drop while other opportunities arise. So, Ackman occasionally sells one stock in favor of better opportunities elsewhere. He recently sold off the remaining stake in a stock his hedge fund, Pershing Square, held for over seven years after adding to two artificial intelligence (AI) stocks he believes are undervalued.

The big winner Ackman just sold

Earlier this year, Ackman and his team sold Hilton Worldwide (NYSE: HLT), one of the world's largest hoteliers. He made a sizable bet on the company in 2018 as investors worried about a macroeconomic slowdown and its impact on hotel stays. He increased the stake in 2020 amid the COVID-19 shutdown, seeing a long-term opportunity in the business's high-quality assets.

Hilton has performed exceptionally well since Ackman's initial purchase. It's maintained an asset-light business model, using franchisees to expand its portfolio while keeping corporate overhead relatively stable. Global hotel rooms have grown from 913,000 at the end of 2018, when Ackman established his position, to 1.3 million rooms today. Additionally, Hilton loyalty members increased from 85 million to 243 million.

The financial results followed suit. Revenue climbed 35% from $8.9 billion to over $12 billion. And with relatively stable operating costs, operating income climbed 88% in that period. Meanwhile, management has used its growing free cash flow to retire shares, driving earnings per share up 145%.

Hilton has continued to execute well recently, expanding its portfolio and increasing customer loyalty. However, the market has caught up with it. Shares now trade for over 32 times forward earnings estimates. Ackman says he initially bought shares at just 23 times earnings estimates. At its current price, it may be worth waiting for the price to come back down before buying the stock. Instead, Ackman sees opportunities in AI stocks.

The two AI stocks Ackman bought last quarter

Ackman has done a good job understanding the long-term implications of advances in artificial intelligence and the opportunities various businesses have to use it to their advantage. He saw a massive success investing in Alphabet in early 2023, when many investors feared it would struggle to maintain its market share amid competition from AI chatbots like ChatGPT.

Now, he's turned his attention to two other tech giants that could be massive long-term winners from generative AI: Amazon (NASDAQ: AMZN) and Meta Platforms (NASDAQ: META).

Amazon is home to the world's largest cloud computing platform, Amazon Web Services (AWS). However, Amazon's cloud revenue growth has failed to keep pace with competitors like Alphabet's Google Cloud since the surge in artificial intelligence spending. Indeed, Amazon was caught flat-footed, but it's since course-corrected. It's now seeing triple-digit revenue growth for its AI services, including the use of its custom Trainium and Inferentia chips, which offer better price-performance than GPUs on many tasks. Furthermore, it's been accelerating revenue in each of the last three quarters, reaching 24% year-over-year growth in the fourth quarter.

Amazon's stock has sold off since its fourth-quarter earnings release, as it revealed plans to spend about $200 billion on capital expenditures this year. That level of spending will very likely push its free cash flow into negative territory. However, Ackman believes "the current investment cycle to frontload infrastructure investments will deliver strong future returns."

Meanwhile, Amazon's core retail business continues to grow at a double-digit pace, with improving operating margins from scale, improvements in its logistics network, and the fast-growing advertising business. Those trends should continue as Amazon's fast shipping capabilities (it just introduced a one-hour shipping option) have enabled it to win a growing share of retail sales.

Meta Platforms also faced significant selling pressure after announcing plans to increase its capital expenditures in 2026. Ackman bought shares after its third-quarter report, but the stock slid further after management revealed the exact extent of its planned spending. Capex could reach as high as $135 billion this year, up from $72 billion last year.

Again, Ackman thinks the step-up in spending right now is worthwhile for Meta. "We believe Meta is one of the clearest beneficiaries of AI," he wrote in his letter to shareholders in February. Indeed, Meta has seen improvements in monetization from its AI algorithms for content recommendation and ad targeting. What's more, it has the potential to improve advertising with generative AI tools and AI agents that can create and test new ad campaigns for small businesses. Its messaging apps could get a substantial boost as it rolls out business AI bots for customer service, sales, and other interactions.

Both Meta and Amazon trade at very attractive valuations based on earnings expectations. Meta shares dipped below a forward P/E ratio of 20, and investors can buy Amazon shares for less than 27 times earnings expectations. Both are set to grow faster than Hilton and trade at valuations well below the hotelier's. It's no wonder Ackman ditched the latter in favor of the two AI giants facing a temporary setback in their stock prices.

Adam Levy has positions in Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, and Meta Platforms. The Motley Fool has a disclosure policy.