Artificial intelligence (AI) has been in development for nearly a century. The concepts behind it were first discussed back in the 1930s by noted mathematician and computer scientist Alan Turing. Turing is also credited with engineering the first modern computer and developing the predecessor to contemporary algorithms. Further developments by numerous pioneers in the field eventually brought together enough computing horsepower, big data analysis concepts, and cloud computing systems to produce some dramatic advances in the technology this past year. These advances forced AI into the spotlight in the tech world and in the investing world.
News that the next generation of generative AI was ready to go started a stampede by big tech to profit from this fast-evolving technology, and the stakes are massive. Cathie Wood's Ark Investment Management has run an analysis of the potential and concluded that AI software could represent a $14 trillion annual revenue opportunity by 2030.
Some of the world's most successful hedge fund billionaires are positioning themselves to profit from this potential AI gold rush, buying shares of the companies they feel are best positioned to profit from the proliferation of the technology.
Here are two AI stocks billionaires are buying hand over fist.
Image source: Getty Images.
1. Amazon: Jumping on the generative AI bandwagon
Billionaire hedge fund manager and philanthropist Seth Klarman is something of a legend among value investors. He was also dubbed "the most successful and influential investor you have probably never heard of" by The New York Times. Klarman's value investing tome, Margin of Safety: Risk Averse Investing Strategies for the Thoughtful Investor, sold just 5,000 copies when it was published and has long since gone out of print. However, devotees looking to own Klarman's magnum opus are often willing to pay hundreds or even thousands of dollars to get their hands on a used copy.
Klarman's hedge fund, Baupost, which has roughly $25 billion in assets under management, recently made a sizable purchase of Amazon (AMZN -1.61%) stock. In the second quarter, the billionaire bought roughly 964,000 shares, a new position representing more than 2% of Baupost Group's holdings, currently worth more than $133 million.
In Amazon's 2022 letter to shareholders, CEO Andy Jassy said the company had been using AI "extensively for 25 years ... in everything from personalized e-commerce recommendations, to fulfillment center pick paths, to drones for Prime Air, to Alexa, to the many machine learning services [Amazon Web Services (AWS)] offers." He made it clear the company plans to "invest substantially" in generative AI, suggesting it will "transform and improve virtually every customer experience."
After launching its new generative AI service -- called Bedrock -- for cloud computing customers earlier this year, Amazon quickly announced an expansion of the platform, debuting "additional foundation models, new model provider, and advanced capability to help customers build generative AI applications."
The service is based on Amazon's Titan large language model (LLM), which users can customize to their situation. Many smaller companies don't have the resources to build their own LLMs, as "really good" LLMs can cost "billions of dollars" and take "many years" to train, according to Jassy.
It's important to note that it likely wasn't only Amazon's increasing adoption of AI that made it an appealing choice for Klarman, but also its bargain basement price. The stock currently sells for roughly 2 times next year's sales, making it a steal at this price. Furthermore, outside the recent downturn, the last time Amazon stock was this cheap was in early 2016.
2. Microsoft: A catalyst for the current AI gold rush
On the other end of the investing spectrum is Ken Griffin, well-known founder and CEO of hedge fund Citadel Advisors, who's known for taking big swings. The billionaire made a name for himself by correctly predicting the 1987 market crash. Griffin cemented his place in Wall Street history by making Citadel the most profitable hedge fund ever, notching gains of $16 billion in 2022.
Citadel Advisors, with nearly $90 billion in assets under management, added to its already considerable position in Microsoft (MSFT 0.11%) during the second quarter, snapping up more than 2 million additional shares, an increase of 149%. That brings the total to more than 3.4 million shares, currently worth nearly $1.14 billion.
Microsoft arguably kicked off the current AI gold rush when the company invested more than $13 billion in ChatGPT creator OpenAI. However, the genius in its move was recently made clear when it introduced Microsoft 365 Copilot, an AI-fueled personal assistant designed to help users be more productive. Copilot integrates with existing Microsoft software to create draft responses to emails, analyze trends, create presentations or data visualizations, automate repetitive tasks, and even draft code. The company will charge $30 per user per month for Microsoft 365 users, which could eventually generate as much as $100 billion annually in incremental revenue for Microsoft.
Despite its massive opportunity, Microsoft is currently trading for a pretty reasonable 30 times earnings, which is a steal for an industry leader riding a significant secular tailwind. This no doubt factored into Griffin's decision to buy Microsoft.
