While 2022 was a year investors were happy to see in the rearview mirror, the stock market has been off to the races this year. The S&P 500 has gained roughly 16% thus far in 2023, an abrupt turnaround compared to its 19% decline last year.
Helping drive the market's current upswing is enthusiasm surrounding recent advances in artificial intelligence (AI). Large language models (LLMs) gave rise to generative AI and the birth of ChatGPT. The next-generation chatbot helped illustrate the potential productivity gains, which could increase economic output by trillions of dollars.
Investors sensed an opportunity to profit and have been scrambling to pick up shares of the companies best positioned to capitalize on the AI revolution. This includes some of the world's most renowned billionaires, such as Chase Coleman. In the second quarter, the hedge fund manager shuffled his holdings, selling three of the most popular AI stocks to increase his stake in another.
Let's take a closer look at his recent moves.
Image source: Getty Images.
Who is Chase Coleman?
Coleman is a highly respected name on Wall Street. He got his start at Tiger Management, one of the most successful and influential hedge funds ever. Nearly 200 hedge funds can trace their roots to Tiger, as many of its former managers started their own funds. Coleman was one of the vaunted group of "Tiger Cubs," trained by legendary hedge fund manager Julian Robertson Jr.
At just 24 years old, Coleman struck out on his own with $25 million in seed money from Robertson, founding Tiger Global Management, parlaying his starting capital into a $75 billion financial empire.
In 2020, Coleman was named the top-earning hedge fund manager of the year, generating gains of 48%, three times that of the S&P 500. Forbes currently ranks Coleman as the 253rd richest person in the world, with an estimated worth of $8.5 billion.
Considering his background, investors would do well to consider Coleman's moves.
Slashing several key AI positions
In the second quarter, Tiger Global reduced its holding in several notable AI stocks. Coleman sold nearly 6 million shares of Amazon (AMZN 2.93%) stock, reducing his exposure by roughly 62%. He continues to hold 3.7 million shares, currently worth $509 million, or about 4% of his portfolio.
He also significantly reduced his stake in Alphabet (GOOGL 0.53%) (GOOG 0.46%) by 55%, selling roughly 4.5 million shares. He retained over 3.8 million shares worth $494 million, representing about 4% of his holdings.
Finally, Coleman sold a much smaller 262,000 shares of Microsoft (MSFT 0.46%). Notably, his remaining stake in Microsoft is still among his largest, with nearly 5.7 million shares, valued at more than $1.8 billion and 16% of Tiger's holdings.
Notably, all three of these companies are hard at work developing AI products. Amazon recently released Amazon Bedrock, which provides several foundational AI models for Amazon Web Services (AWS) users, the company's cloud infrastructure service. Meanwhile, Alphabet also recently introduced AI tools for its cloud customers and debuted many products and services integrated with AI.
However, Microsoft stole the show, introducing 365 Copilot, a suite of next-generation AI productivity tools that integrate with the company's Office suite. Copilot can produce first drafts of documents in Word, build presentations in PowerPoint, analyze trends in Excel, and create draft email responses in Outlook, among many other productivity-enhancing tasks.
Billionaire Dan Loeb, founder of hedge fund Third Point, suggests that Copilot alone could increase Microsoft's revenue by "$25 billion or more in software sales alone." This new and valuable revenue stream likely convinced Coleman to keep the majority of his large position in Microsoft.
Here's what he bought instead
One of Tiger Global Management's most notable purchases in the second quarter was that of chipmaker Nvidia (NVDA 0.28%), increasing his holdings by 1,333%. The billionaire added more than 584,000 shares of Nvidia stock, which brings his stake to more than 628,000 shares, currently worth roughly $275 million.
This move is even more notable because Nvidia stock has been on fire this year, up more than 200% as of this writing. Nvidia is the undisputed leader in chips used for AI, controlling an estimated 95% of the market processors used in machine learning, according to data compiled by New Street Research.
With those credentials, the company is well-placed to benefit from the AI revolution. Nvidia's outlook for its fiscal 2024 second quarter stunned Wall Street, as the company guided for revenue to increase 64% year over year and 53% sequentially, driven by accelerating demand for chips used for generative AI.
A soaring stock price has driven Nvidia's valuation into the stratosphere, with the stock currently selling for 55 times next year's earnings and 19 times next year's sales. This nosebleed valuation has caused some investors to stay on the sidelines, concerned that a near-term correction might be coming.
While those concerns may be justified, there is simply no better chip for training and running AI models. This puts Nvidia at the intersection of a technological paradigm shift that could continue for years. Investors with a long-term outlook should buy the stock and buckle up for the potentially lucrative but bumpy ride ahead.
