There probably isn't a hotter trend on the planet right now than artificial intelligence (AI). The term refers to the use of software and systems to cover tasks that humans would normally handle.
This next-big-thing investment has some big-dollar implications. According to a report put out by PwC, AI could represent a $15.7 trillion contribution to the global economy by 2030.
Best of all, it's an innovation that has broad-reaching applications in virtually all sectors and industries. Although tech stocks will undoubtedly benefit from the rise of AI, there's a world of innovation being launched outside of the tech sector.
However, next-big-thing investments have a checkered history on Wall Street. While game-changing innovations can have major economic and company-specific impacts as they mature, they tend to lead to bubbles early on. This is a fact not lost on Wall Street money managers.
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Based on the latest round of Form 13F filings in mid-May that cover trading activity during the first quarter, a number of billionaire investors ran for the exits from three ultra-popular AI stocks.
Tesla
The first exceptionally popular AI stock that had billionaire fund managers thinking twice during the first quarter is electric-vehicle (EV) manufacturer Tesla (TSLA 15.31%). Its EVs use sensors and machine-vision cameras that work with its Autopilot to provide partly autonomous driving.
Despite Tesla having first-mover advantages and being the only profitable pure-play EV stock, five billionaires were quick to press the sell button:
- Jeff Yass of Susquehanna International
- Ken Griffin of Citadel
- John Overdeck and David Siegel of Two Sigma
- Steven Cohen of Point72 Asset Management
Keeping things in the same order as they're listed above, these billionaires respectively sold approximately 9.29 million shares, 7.09 million shares, 1.47 million shares, and 877,800 shares of Tesla stock.
One reason billionaires appear less than enamored with Tesla looks to be its pricing strategy. It has reduced the price on key models globally around a half-dozen times since the year began.
While optimists had suggested that these price cuts were representative of production efficiencies, CEO Elon Musk made clear during Tesla's annual shareholder meeting in mid-May that these price reductions were solely in response to demand. With inventory levels building, there's a real risk that automotive margins will shrink considerably in the quarters to come.
Billionaires might also be wary of Tesla's leadership. Although Musk is a bona fide innovator who has delivered big-time returns for his shareholders, he's also a tangible liability. Many of Musk's promises and innovations go unfulfilled.
The third possible concern is the company's valuation. Despite Detroit automakers latching on to Tesla's Supercharger network, the company has struggled to generate a profit outside of selling and leasing its EVs. Whereas most auto stocks trade at high-single-digit price-to-earnings (P/E) ratios, Tesla is commanding a multiple of 75 times Wall Street's consensus earnings in 2023. That's an exceptionally steep price to pay as automotive margins tumble.
Baidu
A second ultra-popular artificial intelligence stock that had billionaire money managers running for the exit in the March-ended quarter is China-based internet search giant Baidu (BIDU 5.62%). The company incorporates AI into its cloud services, its autonomous ride-hailing company Apollo Go, and its recently launched chatbot.
The first quarter saw four billionaire money managers completely exit or reduce their funds' stake in Baidu:
- Ray Dalio at Bridgewater Associates
- Israel Englander at Millennium Management
- Jeff Yass at Susquehanna
- Jim Simons at Renaissance Technologies
Dalio oversaw the disposition of Bridgewater's entire 702,473 shares of Baidu, while Englander, Yass, and Simons dumped 551,737 shares, 482,399 shares, and 247,800 shares, respectively.
One reason for this billionaire exodus might have to do with Baidu's valuation. In the five months between the start of November 2022 and end of March 2023, shares of Baidu doubled. A triple-digit gain in such a short time might have been the impetus that caused billionaires to ring the register.
Another potential worry for investors is the market share that Baidu's search engine has ceded in recent months. Based on data from GlobalStats, Baidu still accounted for a hearty 56.4% of China's internet-search market share as of May 2023. But that's down from 75.6% in June 2022.
Microsoft has picked up significant share with its search platform Bing thanks to its incorporation of AI. Between July 2022 and May 2023, the company's share of China's internet search market has jumped nearly 9 percentage points to 18.9%. For Baidu, search represents its cash-cow operating segment.
However, Baidu's AI-driven operations have been firing on all cylinders. Even amid weaker economic growth in China, its non-online marketing segments, which include its AI Cloud and Apollo Go, have sustained double-digit sales growth. In other words, Baidu continues to look like a deal at just 13 times Wall Street's forward-year consensus earnings.
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Meta Platforms
The third ultra-popular AI stock that has billionaires running for the exit is social media company Meta Platforms (META -2.41%). Meta is using AI in a number of ways, including as a filter for comments on its social media sites, as a model via its AI language model LLaMA, and within the metaverse.
Even though Meta is a leader in the social media industry, four billionaire money managers were quick to press the sell button during the first quarter:
- Ken Griffin of Citadel
- Ken Fisher of Fisher Investments
- Jeff Yass of Susquehanna
- Steven Cohen of Point72
These billionaires sold roughly 4.15 million shares, 3.81 million shares, 2.76 million shares, and 2.18 million shares, respectively.
The mammoth rally in shares of Meta might be the prominent reason billionaire investors took some of their chips off the table. Between the start of November and the end of the first quarter, shares of Meta catapulted from $90 to about $210. A triple-digit gain on a megacap stock in less than half a year is almost always going to entice some highly successful money managers to lock in some of their profits.
Something else to consider is that Meta Platforms is heavily reliant on advertising revenue. Although the company loves to discuss the prospects of the metaverse, AI, and virtual/augmented reality, 98.1% of its total sales in the first quarter were derived from advertising.
Ad spending is highly cyclical and tends to taper at the first hint of possible economic weakness. At the moment, there's no shortage of economic indicators and metrics signaling a heightened possibility of a U.S. recession in the quarters to come.
But when push comes to shove, Meta is still historically cheap. Even after tripling from its 2022 lows, its price-to-cash-flow ratio remains well below its historic norm. As long as Meta's social media "real estate" -- Facebook, WhatsApp, Instagram, and Facebook Messenger -- continues to be among the most downloaded in the world, the needle should be pointed higher.
