One of the best ways to get a glimpse into the minds of prominent investors is to look at their 13F filings. These forms are required by the Securities and Exchange Commission (SEC) and break down the buying and selling activity of large institutional money managers.
Recently, I parsed through the 13F of Third Point, a hedge fund started by billionaire investor Dan Loeb. Given the moves he is making, I would say that Loeb is bullish on artificial intelligence (AI). While this shouldn't come as a surprise, I was intrigued by the particular companies he's buying.
The AI narrative has been dominated by Microsoft and Nvidia so far. Nevertheless, Loeb made some splashy buys in two other members of the "Magnificent Seven," recently buying 900,000 shares of Amazon (AMZN -0.09%) and 3 million shares of Alphabet (GOOG 0.92%) (GOOGL 0.93%).
I like these moves a lot. Let's break down how Amazon and Alphabet are quietly emerging as leaders in the AI realm, and explore why each stock is a lucrative buy right now.
1. Amazon: The cash-flow machine
Amazon is primarily known for its e-commerce marketplace and cloud computing business, Amazon Web Services (AWS).
But over the years, the company has quietly expanded into other growth areas including streaming, advertising, grocery delivery, and more. Building such a diversified business has provided Amazon with a unique opportunity.
The thesis is that Amazon can integrate AI-powered services across its ecosystem, thereby reaching consumers on a broader level and cross-selling more products to them.
One of the most important moves Amazon made in the last year was a $4 billion investment in an AI start-up called Anthropic. The main idea was to use Anthropic to accelerate growth in AWS. It uses AWS as its primary cloud provider and is training its generative AI models on Amazon's infrastructure.
This is important because Anthropic is ultimately serving as a source of lead generation for AWS, helping propel deals for new products including Amazon Bedrock.
Another move is Amazon's investments in data centers. The company recently committed $11 billion to build new data centers in Indiana. This decision came at a crucial time.
At the moment, Nvidia dominates the market for AI semiconductors. But Amazon is developing its own line of chips, Trainium and Inferentia. Building its own data centers should help it become more independent with chips in the long run. It also provides Amazon with a path to keep the majority of its AI ambitions internal, relying less on third-party providers.
Image source: Getty Images.
Even though the AI revolution is very much in its infancy, over the last 12 months Amazon has generated $50 billion of free cash flow as the company witnesses new growth across its entire business.
I think AWS in particular has a bright future. Furthermore, as AI becomes more engrained across Amazon's entire business, the investments it is making today are extremely savvy, and I am bullish on the long-term payoff.
Amazon's price-to-sales (P/S) ratio is 3.3, nearly identical to its 10-year average. I think a lot of investors are discounting Amazon's position in the AI landscape and are underappreciating the potential upside the company could see in the long run. To me, the stock is a bargain, and I am aligned with Loeb's decision to scoop up shares.
2. Alphabet: A rising star in the cloud
Alphabet is the parent company of Google and YouTube. With the broad reach each of these has on the internet, it's not surprising that Alphabet's largest source of revenue is advertising.
While the company is certainly a leader in online advertising, Alphabet does face some stiff competition from the likes of Meta Platforms and TikTok. And the advertising industry is cyclical and can be unreliable.
One way that Alphabet is responding is through its competitive advantage: data. It owns one of the biggest libraries of consumer search trends, a huge asset that it can use to train its large language model, called Gemini.
The pace at which Gemini can be trained is also important. As Google and YouTube remain dominant forces online, Alphabet is strongly positioned to store, analyze, and process myriad data sets to hone Gemini and create more products and services.
One area where Alphabet is already demonstrating some impressive growth is in cloud computing. Google Cloud Platform is Alphabet's fastest growing business and is already generating operating profits.
As with Amazon, I wouldn't sleep on Alphabet's potential to become a strong force in AI. The company is building a full-spectrum AI business, spanning workplace productivity tools, cloud computing, e-commerce, consumer search, and more.
At a price-to-earnings (P/E) ratio of 27.3, the stock trades at a discount to each of its Magnificent Seven peers except Meta. To me, Alphabet shares look dirt cheap, and I think long-term investors will enjoy market-beating returns as AI continues to play a big role in the company.
