Image source: Getty Images
Pershing Square Holdings (LSE: PSH) isn’t your average FTSE 100 stock. This investment trust gives everyday investors exposure to the hedge fund run by renowned stock-picker Bill Ackman.
Despite a somewhat underwhelming 2024, the long-term performance of his fund (Pershing Square Capital Management) has been excellent. This is reflected in the trust’s share price, which is up 160% in five years.
Ackman is known for taking large stakes in a small number of US stocks (typically eight to 12). At the end of September, his largest holdings were Alphabet, asset manager Brookfield, Hilton Hotels, and Chipotle Mexican Grill.
On 7 February though, Ackman declared on social media that he’d been busy accumulating a boatload of shares of another well-known company.
Giant stake
The stock in question is Uber Technologies (NYSE: UBER), which Pershing started buying in early January.
Based on the current price of $74.60, the 30.3m shares it has accumulated are worth a little over $2.2bn. That means Uber is Pershing Square’s largest holding!
In a post on X, Ackman wrote: “We believe that Uber is one of the best managed and highest quality businesses in the world. Remarkably, it can still be purchased at a massive discount to its intrinsic value. This favorable combination of attributes is extremely rare, particularly for a large-cap company.”
I’ve been saying this for a while. Even after the recent spike, the stock is trading at 22 times next year’s forecast earnings, potentially falling to 17 by 2027. For a global platform leader, I think that’s a bargain.
Putting my money where my mouth is then, I took a position in the ride-sharing giant in September. And when a handful of writers from The Motley Fool were asked late last year to choose our top US stock to consider buying for 2025, I went with Uber.
The stock’s year-to-date return is 23.7%. So far, so good.
Cash machine
Uber also thinks its own shares are too cheap. In the Q4 results, CFO Prashanth Mahendra-Rajah said: “We believe we remain undervalued despite [our] strong fundamentals, and plan to be active and opportunistic buyers of our stock.”
Uber has the wherewithal to do so these days, generating free cash flow of $1.7bn in the last quarter.
Ackman also alluded to this: “Since he joined the company in 2017, Dara Khosrowshahi CEO has done a superb job in transforming the company into a highly profitable and cash-generative growth machine.”
I second that. Indeed, back in September, I wrote: “[Uber] is quickly becoming a cash machine. From negative cash flow in 2021, the company’s free cash flow is expected to approach $10bn in 2026. Talk about scaling up!“
Robotaxi threat or opportunity?
Why is the stock apparently undervalued then? I think Wall Street is nervous about Uber being disrupted by the robotaxis of Waymo and Tesla.
Looking forward, I’d say that’s the biggest risk. And that equally applies to Pershing Square, given that Uber is now its largest holding.
My view is that self-driving taxis will eventually become commoditised, with many different players. And that instead of building their own networks, most will choose to partner with Uber to tap into its rapidly growing customer base (171m).
I think both Uber and Pershing Square are worth considering for long-term investors.
