Ackman's Microsoft-for-Google Swap Underperforms Despite Favorable Valuation

A high-profile portfolio rotation by Bill Ackman’s Pershing Square, which sold most of its Alphabet (GOOGL) position to buy Microsoft (MSFT) in the first quarter of 2026, has so far been met with unfavorable market performance. The trade has created a classic tension between near-term momentum and long-term valuation, with Microsoft's stock down -18.7% year-to-date while Alphabet has climbed +9.4%.

A Trade Under Pressure

The immediate market reaction has been challenging for the hedge fund's strategic shift. The performance disparity has reportedly contributed to a ~15.9% net asset value (NAV) drawdown for Pershing Square in the first quarter of 2026.

At the same time, sentiment around Alphabet has been bolstered by several key developments. These include Warren Buffett's Berkshire Hathaway initiating a new ~$31 billion position in the company and an analyst target price increase from KeyBanc to $445 per share.

The Fundamental Case for Microsoft

Despite the negative price action, Ackman's thesis appears to be grounded in a significant valuation arbitrage between the two technology giants. Microsoft trades at a notable discount to Alphabet on several key financial metrics, even as both companies report comparable revenue growth of approximately 18%.

A comparison of their fundamentals highlights the disparity:

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• EV/EBITDA Multiple: Microsoft at 15.9x vs. Alphabet's 25.4x
• Free Cash Flow Yield: Microsoft at 2.5% vs. Alphabet's 1.5%
• Net Margin: Microsoft at 39.3% vs. Alphabet's 37.9%

This valuation gap has been noted by analysts. Deutsche Bank pointed out that Microsoft is trading at roughly 20 times its next-twelve-months earnings, a steep discount to its five-year average of 29x. Furthermore, Microsoft has been working to de-risk its AI supply chain by integrating its own MAI models into products, reducing its dependency on partners like OpenAI.

Headwinds and the Path Forward

Both companies face their own set of challenges. Alphabet is navigating delays for its Gemini 3.5 Pro AI model and faces ongoing regulatory pressure in the European Union. For Microsoft, risks include rising capital expenditures for its AI infrastructure and concentration risk related to its OpenAI partnership.

The first major test for Ackman's investment thesis is fast approaching with Microsoft's earnings report scheduled for July 29. Market participants will be closely watching for a reacceleration in Azure AI growth. A figure above ~21% could serve as a powerful catalyst to validate the fund's long-term, value-oriented bet.