There's no beating about the bush: It's been a trying year for investors. The combination of historically high inflation, a weakening U.S. economy, and heightened geopolitical tensions (e.g., Russia's invasion of Ukraine), pushed both the broad-based S&P 500 and technology-centric Nasdaq Composite firmly into a bear market.
However, you wouldn't know the stock market is suffering through one of its worst years in decades by the actions of Wall Street's most-successful investors. Instead of retreating to the sideline, billionaire money managers have been actively buying stocks as the market dips. In particular, billionaires have really taken a liking to tech stocks focused on forward-looking innovation.
What follows are four next-generation tech stocks billionaires simply can't stop buying.
Image source: Getty Images.
Upstart Holdings
The first innovative powerhouse that at least one billionaire money manager can't stop purchasing is cloud-based lending platform Upstart Holdings (UPST -2.58%). During the second quarter, billionaire Philippe Laffont of Coatue Management acquired roughly 2.36 million shares.
What puts Upstart on the leading edge of its industry is its use of artificial intelligence (AI) to vet loan applications. Rather than rely on the traditional (and slow) loan-vetting process, Upstart leans on predictive technologies and previously vetted loan data to approve and fully automate nearly three-quarters of all loans its processes. This saves the six dozen financial institutions Upstart has partnered with time and money.
However, what stands out even more about Upstart is the broader pool of applicants being approved. The typical loan applicant to gain approval with Upstart has a lower average credit score than the those approved with the traditional vetting process. Yet, delinquency rates between Upstart's AI-based process and the traditional vetting process have been similar. The implication here is that Upstart can expand the potential pool of borrowers for banks and credit unions without adversely impacting their credit-risk profile.
Laffont is likely also encouraged by Upstart's push into new verticals. Whereas it's spent years processing personal loan applications, it's begun handling auto loan and small business loan originations. On a combined basis, auto and small business loans are more than 10X the market size of personal loan originations.
Snowflake
The second next-generation tech stock billionaires can't seem to get enough of is cloud data-warehousing company Snowflake (SNOW -1.34%). The June-ended quarter saw billionaire Jim Simons of Renaissance Technologies add more than 1.25 million shares to his fund's existing position (which now stands at more than 2 million shares).
The answer to "Why Snowflake?" can be explained by the company's unique operating model. For instance, in the wake of the COVID-19 pandemic, businesses are shifting data into the cloud at an accelerated rate. However, sharing that data across competing cloud infrastructure platforms can be challenging. Snowflake's platform resolves this by building its infrastructure atop the leading cloud-service providers. In other words, Snowflake clients can seamlessly share and move data with ease.
What's more, Snowflake has shunned the extremely common practice among cloud providers of pushing subscriptions. Instead, Snowflake offers something of a pay-as-you-go service that charges based on the amount of data stored and Snowflake Compute Credits used. This provides more cost transparency for the company's clients than a one-size-fits-all subscription package.
Arguably the biggest obstacle for Snowflake is the company's own valuation. Even after a significant share price haircut, the company is valued at 27 times Wall Street's projected sales of roughly $2 billion in fiscal 2023. But if Snowflake can make good on its march to $10 billion in net sales by fiscal 2029 (calendar year 2028), billionaires like Simons may be glad they paid a premium to hold a stake in Snowflake.
Image source: Getty Images.
Palantir Technologies
The third cutting-edge tech stock billionaires can't stop buying is data mining company Palantir Technologies (PLTR -2.58%). During the second quarter, billionaire Israel Englander's Millennium Management bought nearly 1.9 million shares of Palantir stock. To boot, Simons' Renaissance Technologies more than doubled its stake by purchasing close to 15.69 million shares.
Billionaires love Palantir for the simple reason that its technology at scale hasn't been duplicated by any other company. Put in another context, Palantir has no direct competitors that can replace the services it's offering to federal governments and predominantly large-scale businesses.
The company's Gotham operating system is an AI-driven platform designed to help federal governments gather data, plan missions, accelerate decision-making. Large contract wins from the U.S. government tied to Gotham explain why Palantir has sustained a 30% or greater sales growth rate for the past couple of years.
However, Gotham has a limited ceiling. That's because Palantir's management won't extend the Gotham operating system to certain governments, such as China. Over the long run, the company's Foundry software is its golden ticket to sustained double-digit growth. Foundry helps businesses streamline their operations by making sense of big data. In the June-ended quarter, Palantir's commercial customer count more than tripled to 119 from the year-ago quarter. In short, Foundry is in the very early innings of its growth phase.
CrowdStrike Holdings
The fourth and final next-generation tech stock billionaires can't stop buying is cybersecurity giant CrowdStrike Holdings (CRWD -3.60%). Billionaire Steve Cohen of Point72 Asset Management purchased over 819,000 shares of CrowdStrike during the second quarter, which ultimately boosted Point72's stake to 955,234 shares.
What makes CrowdStrike tick is the company's AI-powered Falcon security platform. Falcon oversees in the neighborhood of 1 trillion events on a daily basis, which allows the platform to become more adept at recognizing and responding to potential end-user threats. While CrowdStrike doesn't offer the cheapest cybersecurity solutions, the fact that its gross retention rate is hovering around 98% clearly implies that Falcon is effective.
Something else to consider about CrowdStrike, and the cybersecurity industry as a whole, is that cybersecurity has evolved into a basic necessity service. No matter how poorly the stock market or U.S. economy perform, bad actors don't take a day off from trying to steal enterprise or customer data. This creates a base level of demand for a company like CrowdStrike.
But the best thing of all about CrowdStrike might just be its ability to encourage its existing clients to spend more. In a span of five years, the percentage of customers with four or more cloud-module subscriptions catapulted from 9% to more than 70%. Having existing customers purchase additional services is CrowdStrike's golden ticket to subscription gross margins of around 80%.
