Bill Ackman’s Pershing Square Says Wall Street Is ‘Penalizing Hyperscalers’ For Build-Out Costs, Ignoring Growth Potential

• AI chip and hardware companies have led the market rally, with semiconductor stocks rising 44% and technology hardware stocks gaining 36%.

• Meanwhile, Microsoft, Meta, Amazon and Alphabet shares rose just 8% on average despite 27% earnings growth.

• Pershing Square thinks investors and analysts are overlooking the potential for higher revenue and profits from hyperscalers.

Bill Ackman’s Pershing Square Inc. (PS) believes Wall Street is underestimating the long-term potential of major technology companies investing heavily in artificial intelligence (AI), focusing too much on rising infrastructure costs while overlooking future revenue growth, stronger cash flows and returns. The investment firm also sees attractive opportunities across the broader stock market.

Pershing Square stock traded over 2% higher overnight, heading into Tuesday.

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Pershing Square Highlights Wider Gap Between Stock Prices And Earnings

In its third-quarter letter to shareholders, Pershing Square noted that the S&P 500 advanced slightly more than 2% in Q3, but the typical company in the index fell 4%. More than 60% of its constituents ended the period lower. Through Sept. 30, the benchmark had climbed 13% for the year, while the average constituent gained just 1%.

Meanwhile, estimates for the median S&P 500 company’s earnings per share rose 4% during the quarter and nearly 10% over the first nine months. Pershing Square said this disconnect has created opportunities to buy businesses whose underlying performance has improved despite weaker share prices.

AI Infrastructure Suppliers Lead The Rally

According to Pershing, companies supplying semiconductors and technology hardware have benefited significantly from AI-related spending. The S&P 500 Semiconductor Index has advanced 44% this year, while the technology hardware index has gained 36%.

“The buildout of AI infrastructure has been one of the principal drivers of stock market performance this year, with the ‘picks and shovels’ companies having been the largest beneficiaries.”

However, major cloud and technology companies, including Microsoft (MSFT), Meta Platforms (META), Amazon (AMZN) and Alphabet (GOOGL), have delivered an average share price increase of just 8%, despite reporting approximately 27% earnings growth.

“The decline in the hyperscalers’ P/E multiples has largely been driven by investor concerns regarding the potential returns they will earn on their elevated capex spending.”