When it comes to investing in artificial intelligence (AI), one stock that is absolutely hard to ignore is Nvidia (NVDA -1.54%). The company almost single-handedly kicked off the AI revolution by developing the graphics processing units (GPUs) that make AI possible. The results of Nvidia's fiscal 2024 (ended Jan. 28) help illustrate its uncontested success. Revenue of $61 billion soared 126% year over year, while its diluted earnings per share (EPS) of $11.93 surged 586%.
I have no doubts that Nvidia will continue to succeed, but others have doubts. The potential for cyclicality in the chip industry, a frothy valuation, and rising fears of competition have some investors looking for viable alternatives, and following the example of a successful money manager might provide ideas.
Billionaire Daniel Loeb made his bones as the CEO of Third Point, the hedge fund he founded in 1995. From seed capital of just $3.4 million, Loeb spun that into a financial empire worth $6.6 billion. He's made no secret about his feelings regarding AI, which he views as "transformational," and believes a "profound economic upheaval" is under way. While there are many stocks that will reap the benefits of generative AI, a quick look at Third Point's holdings reveals three that have the Loeb seal of approval -- and none of them are named Nvidia.
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Artificial intelligence stock No. 1: Microsoft -- 11.5% of holdings
Microsoft (MSFT -3.21%) deserves at least partial credit for helping to spark the AI revolution by integrating AI across a wide range of its cloud and software offerings. There's perhaps no bigger potential opportunity for the company than that represented by Copilot, Microsoft's AI-powered digital assistant. Copilot offers a suite of tools that help automate and streamline mundane and time-consuming tasks, thereby boosting productivity. According to Microsoft, demand has been off the charts and users seem to love it.
Loeb has been incredibly bullish and has minced no words about its potential. "Microsoft's introduction of its AI-assisted Office Copilot software ... could increase its revenues by as much as $25 billion or more on software sales alone."
Third Point trimmed about 9% of its position in Microsoft in Q4, even as the value of the position rose -- thanks in part to the stock's 19% gains during the quarter.
Microsoft stock was selling for a modest premium at 34 times earnings, but the company has only just begun to reap the rewards of its AI strategy, and Loeb obviously believes it's worth every penny -- and so do I.
Artificial intelligence stock No. 2: Amazon -- 9.7% of holdings
Loeb has been a firm believer in Amazon (AMZN -3.29%), which he first invested in years ago. He provided insight into his thinking in early 2022. At the time, the company's market cap clocked in at $1.6 trillion, and Loeb opined that the company had $1 trillion in "untapped value." He estimated that the e-commerce segment alone was worth more than $1 trillion, while Amazon Web Services (AWS) -- its cloud infrastructure segment -- was worth another $1.5 trillion. For context, Amazon's current market cap is $1.9 trillion, so there's still significant upside ahead.
Loeb believes the "most direct consequence" of the rapid adoption of generative AI is that there will be "an acceleration in cloud usage" in order to tap the large language models that underpin AI -- including those offered by Microsoft Azure, AWS, and Alphabet's Google Cloud. He called cloud services the "'picks and shovels' of the AI gold rush and should benefit regardless of which products ultimately 'strike gold'."
Loeb also trimmed his Amazon holdings by about 10% but, like Microsoft, the total value of his stake actually rose, thanks to a 20% increase in Amazon's stock price in the fourth quarter.
However, at less than 3 times sales to close out 2023, Amazon was, and still is, attractively priced.
Artificial Intelligence stock No. 3: Meta Platforms -- 6.2% of holdings
Loeb's substantial position in Meta Platforms (META -0.57%) is at least partially explained by the ongoing rebound in the digital advertising market, but the company also has a sizable opportunity when it comes to AI. Loeb initiated a position in Q3 and added to it in Q4. Meta has long employed AI to serve relevant content to its social media users and to more accurately target the advertising that provides the lion's share of its revenue.
More recently, Meta has unveiled the next generation of its Large Language Model Meta AI (LLaMA), which is available for hire on all the major cloud infrastructure services. While we don't yet know the significance of its impact on Meta's bottom line, it does represent a new revenue stream for the company.
While Loeb has been mum about his rationale, Meta meets Loeb's criteria of investing in "high-quality companies trading at reasonable valuations." And, as the sun set on 2023, Meta Platforms stock was selling for just 24 times earnings, a discount to a multiple of 26 for the S&P 500.
