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In mid-May, Bill Ackman announced via social media that his Pershing Square Capital had fully exited its long-held position in Alphabet (GOOG) during the first quarter, while simultaneously building a 5.65 million share stake in Microsoft (MSFT). The position was worth approximately $2.09 billion at the end of the quarter, accounting for about 5.3%.
Ackman’s explanation was quite clever: “Selling Google is not a bet against the company. We are very bullish on Alphabet’s long-term prospects, but given current valuation considerations within our finite capital base, we used Google as a source of funds to buy Microsoft.” These remarks framed the essence of the swap as “capital allocation” rather than a “strategic judgment,” but the deep logic behind it is worth a closer look.
Ackman’s Trade Logic: Value Discovery or Timing Play?
Ackman’s timing for buying Microsoft was quite clear. In the first quarter of this year, Microsoft’s stock price suffered a sharp sell-off due to slowing Azure growth and soaring AI capital expenditures, falling more than 22% from its all-time high at one point. As of mid-May, the stock was down about 14% year-to-date. Ackman began building the position right after the February earnings report triggered the sell-off, buying at a valuation of about 21 times forward earnings – a clear discount relative to its historical average.
Supporting this buying decision was Ackman’s judgment on Microsoft’s moat. He pointed out that the Microsoft 365 suite is “deeply embedded” into the daily workflow of nearly every large enterprise, making the moat “nearly impossible to dislodge.” He also argued that the market severely undervalues Microsoft’s roughly 27% economic interest in OpenAI, which he valued at about $200 billion – roughly 7% of Microsoft’s total market capitalization.
Microsoft’s Operational Fundamentals: Solid but With Hidden Concerns
From a fundamental perspective, Microsoft is not without strengths. In the third quarter of fiscal 2026 ended March 31, Azure grew by 39% to 40% year-over-year on a constant currency basis, approaching 40% annual growth, while total revenue rose to $82.9 billion, up 18% year-on-year. The AI business has achieved an annualized revenue run rate of $37 billion, representing a 123% increase compared to the same period last year.
However, three major concerns cannot be ignored. First, profit margins are under pressure. Microsoft’s capital expenditures in the first quarter reached $31.9 billion, and its full-year guidance was significantly raised to approximately $190 billion—well above the market’s expected $150 billion. The sharp increase in capital spending is squeezing profit margins.
Second, the partnership with OpenAI has fundamentally changed. At the end of April, the two sides revised their agreement: Microsoft’s intellectual property license changed from exclusive to non-exclusive, cloud exclusivity was completely terminated, OpenAI can now serve customers of any cloud provider, and Microsoft will no longer pay revenue share to OpenAI. The AI competitive barrier previously built on “exclusive lock-in” has begun to erode. Third, the potential risk of AI disrupting traditional enterprise software remains unresolved. Ackman believes this concern is overblown, but it is not without real basis.
The “Sold” Side of Google: Explosive Growth but Dumped on Valuation
What makes Ackman’s contrarian move of dumping Google so striking is precisely how stellar Google’s earnings performance has been. In the first quarter of 2026, Google Cloud revenue surpassed $20 billion for the first time, surging 63% year-on-year; search advertising revenue reached $60.4 billion, up 19%, with user query volume hitting a record high. Cloud backlog reached $462 billion, nearly doubling from the previous quarter. In contrast, while Microsoft Azure’s roughly 39-40% growth is steady, Google Cloud’s 63% growth is clearly more explosive.
The Valuation Game: Which One Is Really “Undervalued”?
From a historical valuation standpoint, Microsoft has indeed pulled back. But the question that needs to be asked is: Has Google’s current valuation already priced in its growth? Some analysts argue that Google Cloud’s accelerating growth and the AI-enabled search business have not yet been fully priced in by the market, and potential upside remains. In fact, while Pershing Square was selling Google, another well-known hedge fund, Third Point, was building a new position in Alphabet in the first quarter – forming a stark opposing bet. On the Microsoft side, the market is deeply divided over whether its massive annual AI capital expenditure of about $190 billion will generate corresponding returns. If the payback period lengthens or growth slows, hefty depreciation will in turn erode profits.
Conclusion
Ackman’s portfolio swap is essentially a bet between “valuation recovery play” and “high-growth premium.” He chose to bet on Microsoft – that after excessive selling, its valuation would revert and its moat would continue to pay off. He chose to dump Google – cashing out profits at a time when its performance was exploding and its stock price was already at high levels. From a risk-reward perspective, Microsoft’s valuation offers a margin of safety, but Google has demonstrated stronger momentum in AI-driven cloud and advertising dual engines. For ordinary investors, Ackman’s trade provides a perspective to consider, but in an era when the competitive landscape among tech giants is far from settled, the answer is far more complicated than a simple “follow or not.”
