As we look back on 2023, a few things stand out. One is how quickly generative artificial intelligence (AI) rose to prominence. OpenAI's ChatGPT was virtually unheard of as the year began but quickly became the rallying cry for a generation of tech investors.
Another was the emergence of the so-called "Magnificent Seven" group of stocks, which outperformed the broader market by a wide margin (presented in order of stock price percentage gains):
- Nvidia: Up 239%
- Meta Platforms (META -2.41%): Up 194%
- Tesla: Up 102%
- Amazon: Up 81%
- Alphabet (GOOGL -3.37%) (GOOG -3.33%): Up 58%
- Microsoft (MSFT -1.00%): Up 57%
- Apple: Up 48%
It should come as no surprise that the potential to benefit from advancements in generative AI is the gossamer thread that weaves this group of stocks together. What is surprising is that Wall Street -- which rarely agrees on anything -- is moving in lockstep to snatch up stocks best positioned to profit from AI.
Below, I'll look at three stocks that hedge fund billionaires were piling into as 2023 drew to a close.
Image source: Getty Images.
Magnificent Seven stock No. 1: Microsoft
Ken Griffin is something of a legend on Wall Street, famously shorting stocks before the market crash of 1987, better known as "Black Monday." Recent reports suggest the founder and CEO of Citadel plans to return $7 billion in profits to hedge fund investors after generating returns of roughly 15% last year -- outperforming many of his peers -- though the final tally hasn't been released.
This isn't the first time Griffin was at the top of the class. Citadel generated profits of $16 billion in 2022, dubbed "the biggest annual windfall on record" by CNN.
One of the biggest contributors to Griffin's success last year was an investment in Microsoft. Citadel is extremely diversified, with only four positions rising to more than 1% of the fund. Despite those constraints, Microsoft and video game titan Activision Blizzard made up its two largest holdings to close out the third quarter (the most recent period for which regulatory filings are available).
Citadel had amassed a stake of 5 million shares of Microsoft stock, representing 1.7% of the fund, worth roughly $1.87 billion. It also held more than 15 million shares of Activision Blizzard stock, representing 1.5% of the fund's holdings, worth roughly $1.43 billion.
Microsoft recently completed its acquisition of Activision, so the position was likely used to leverage the merger arbitrage -- a way to profit from the difference between Activision's then-current stock price and the eventual purchase price.
However, there's little doubt Griffin owns Microsoft because of the vast potential of AI. He's been vocal about the potential represented by generative AI, admitting that Citadel uses Microsoft Copilot, which he said increases the productivity of the funds' developers by 10%. With 1,500 developers on staff, that's the equivalent of increasing its workforce by 150 people. He also says that the adoption of AI is still in the "early innings."
In its fiscal 2024 first quarter (ended Sept. 30), AI systems like Copilot buoyed Microsoft's Azure cloud results, as revenue grew 29% year over year. This not only outpaced its cloud rivals, but Microsoft noted that 3 percentage points of the gains were the result of increasing demand for AI services.
Magnificent Seven stock No. 2: Alphabet
Billionaire Bill Ackman is the founder and CEO of hedge fund Pershing Square Capital Management and is well known on Wall Street. He made his name as an aggressive activist investor, buying shares in undervalued companies and agitating for change. Among his most notable wins was turning a $60 million position in distressed shopping mall operator General Growth Properties -- a company on the fast track to bankruptcy -- into a profit of nearly $3.5 billion.
Unlike many funds, Pershing Square is highly concentrated, with its $10 billion portfolio invested in just seven companies. The largest stake -- by a fair margin -- is Alphabet. The fund owns 9.38 million Class C shares and 4.35 million Class A shares, making the total value of the stake $1.92 billion. This represents more than 19% of the Pershing Square portfolio.
In an interview last month, Ackman laid out the logic for his biggest stake. "It was AI that created the opportunity for us to buy Google at an attractive price," Ackman said.
He suggested investor fears that Alphabet had fallen behind Microsoft in AI crushed the stock. He went on to note that Alphabet's industry-leading digital advertising business alone is worth the stock price, and investors get all the AI potential "for free." He also believes that Alphabet's AI technology is competitive with -- if not ahead of -- Microsoft's.
Ackman has a point. Alphabet has a long and storied history of developing AI, and the rebound of online advertising from its historic slump is already improving the company's financial results. The vast potential to benefit from AI is icing on the cake.
Magnificent Seven stock No. 3: Meta Platforms
Billionaire Chase Coleman is one of Wall Street's boy geniuses and a member of the fabled Tiger Cubs -- a group of hedge fund managers that learned their craft from Julian Robertson, Jr., legendary founder of Tiger Management. Coleman parlayed $25 million in seed money into more than $13 billion in assets under management for Tiger Global Management, the hedge fund he founded.
Meta Platforms is by far the fund's largest holding, totaling 8.9 million shares, or roughly 20% of the portfolio (not a typo). Its stake is valued at more than $3 billion.
Coleman has made no secret that he's intrigued by the potential of AI, saying, "Tech is interesting again," thanks to the advent of AI, which he refers to as "pretty interesting new technology." His advice for those investing in AI? "Think about it in terms of companies investing in these technologies and how well they use it."
When it comes to using AI, Meta Platforms has a long and distinguished track record, deploying these advanced algorithms to tag people in photos, surface relevant content, and target advertising on its bevy of social media sites. The company also leveraged its AI expertise to develop generative AI models that are available on all the major cloud infrastructure services -- for a fee, of course.
Furthermore, the ongoing rebound in online advertising has already fueled an uptick in Meta's results, a trend that will likely continue.
