Bill Ackman is the founder and CEO of Pershing Square Capital Management, a hedge fund that returned 22% annually over the last five years. By comparison, the S&P 500 (^GSPC 0.16%) returned 16% annually during the same period. That outperformance makes Ackman a good case study for aspiring investors.

In the second quarter, Ackman sold 2.2 million shares of Alphabet (GOOGL 1.77%) (GOOG 1.66%), reducing his stake by 16%. Importantly, while Alphabet is still the largest position in Ackman's portfolio, his decision to sell was nevertheless surprising because Wall Street has consistently been bullish.

Currently, among the 67 analysts that follow Alphabet, 79% rate the stock a buy and the remaining 21% rate the stock a hold. Not a single analyst recommends selling right now, and the same was true during the second quarter. Additionally, the median price target of $205 per share implies 23% upside from the current share price of $166.

Does Ackman know something Wall Street is overlooking?

Alphabet has a strong position in advertising and cloud computing, supported by expertise in artificial intelligence

Alphabet is the parent company of Google, the largest digital advertiser and third-largest public cloud in terms of revenue. Strength in digital advertising is a product of high-traffic web properties like Google Search and YouTube, which let company engage users and source data on an unparalleled scale. In turn, those assets help advertisers put relevant marketing content in front of consumers across the internet.

Meanwhile, strength in cloud computing is a product of technical expertise in areas like data science, artificial intelligence (AI), and machine learning (ML). For instance, Forrester Research recently ranked Google as a leader in AI infrastructure solutions, foundational large language models, and AI/ML platforms. Additionally, principle analyst Mike Gualtieri wrote, "Google is the best positioned hyperscaler for AI."

In summary, Alphabet has a strong competitive presence in two large and growing markets, and it's very well positioned to benefit from the AI boom. Looking ahead, eMarketer estimates digital ad spending will increase at 10% annually through 2028, and IDC estimates spending on public cloud services will increase at 19% annually during the same period, led by robust demand for AI platform services. That bodes well for Alphabet and its shareholders.

So, why did Bill Ackman trim his position in Alphabet in the second quarter? We can only speculate on the answer. It may have been nothing more than profit taking, or perhaps he was worried about share price volatility surrounding an antitrust lawsuit. Alternatively, Ackman may have been concerned about valuation given that Alphabet shares surged 21% during the quarter.

Ackman may have trimmed his Alphabet position to limit volatility from an antitrust lawsuit

Bill Ackman's reason for selling Alphabet may have been to mitigate volatility as an antitrust lawsuit reached a critical stage. To elaborate, the Justice Department sued Google in 2020 on the grounds it had created an illegal monopoly in internet search through exclusionary agreements that made competition from smaller companies virtually impossible.

Ackman knew a ruling was forthcoming in the third quarter, so he may have trimmed his stake in Alphabet during the second quarter to hedge against a sharp decline. If that was his plan, it probably paid off to some degree. Federal judge Amit Mehta ruled ultimately against Google, determining the company did indeed act illegally to maintain its dominance in internet search. The stock declined 22% between July and September.

Importantly, the Justice Department has proposed remediations ranging from conduct restrictions to a company breakup. But most analysts think punitive measures will be mild, and historical precedent supports that sentiment. Antitrust lawsuits have not resulted in a company breakup in 40 years, according to The Wall Street Journal. And the last time a judge tried to break up a big tech company, Microsoft in 2001, the decision was reversed by a federal appeals court.

Ackman may have trimmed his Alphabet position due to concerns about valuation

Alphabet's elevated valuation is another plausible reason why Ackman trimmed his stake in the second quarter. The company had an average valuation of 25.8 times earnings during that period, and it peaked above 28 times earnings toward the end of June. Comparatively, the stock currently trades at 23.9 times earnings.

All things considered, Alphabet is more attractive today than it was in the second quarter, when Ackman sold shares. While regulatory concerns are far from resolved, Wall Street still expects Alphabet's earnings to increase at 17% annually over the next three years. That makes its current valuation look quite reasonable.

Indeed, those figures give a PEG ratio of 1.4, a slight discount to the average reading of 1.5 during the second quarter. Consequently, I would not be surprised if Ackman had started purchasing Alphabet stock again. Either way, long-term investors should consider buying a small position in this popular AI stock today.