There's little question that artificial intelligence (AI) has been the driving force behind the current market rally -- and with good reason. These next-generation algorithms generate original text and images, streamline processes, and automate menial and time-consuming tasks, all with a few simple keystrokes. The potential for vast increases in productivity has companies lining up to see how they can best deploy AI to benefit their respective businesses.
Philippe Laffont knows a thing or two about profiting from emerging technology. The billionaire trained under the watchful eye of hedge fund legend Julian Robertson of Tiger Global Management. Laffont heads up Coatue Management, the world's premier tech-centric hedge fund, which he founded in 1999. Since then, he's parlayed $50 million in starting capital into a financial empire with $58 billion in assets under management. Furthermore, Coatue has far outpaced the returns of the broader market, delivering annualized returns of 14% over the past three years, compared to 8% for the S&P 500.
Laffont believes AI will be one of the prevailing investing themes over the coming decade, and he has his money where his mouth is: Five top AI stocks are Coatue's five largest holdings.
Image source: Getty Images.
Artificial intelligence stock No. 1: Meta Platforms -- 8.2% of holdings
Meta Platforms (META +0.83%) is Coatue's largest AI holding -- and largest overall position, with nearly 4.2 million shares worth more than $2.1 billion. Laffont trimmed the position by 3%, but gains during the second quarter left the position relatively unchanged. It isn't surprising that Meta is his largest position, given the company's long track record of using AI to its advantage. From surfacing relevant content on its social media platforms to recognizing and tagging people in photos, Meta was an early adopter of earlier branches of AI.
The company is something of an exception compared to its big tech colleagues, as Meta doesn't have a cloud infrastructure service to hawk its AI. That didn't stop the company from creating its homegrown Large Language Model Meta AI (Llama), which is available on all the major cloud services -- for a price. Advertising makes up the lion's share of Meta's revenue, so the company offers a growing suite of free-to-use AI-powered tools that help marketers on its platforms succeed, which keeps them coming back for more.
Improving economic conditions are already lifting its digital advertising business. And at just 24 times forward earnings, Meta is inexpensive in light of its vast opportunity.
Artificial intelligence stock No. 2: Amazon -- 8.1% of holdings
Amazon (AMZN +2.12%) was already Laffont's second largest position, but he increased it by 7% in Q2. It now totals roughly 10.8 million shares worth nearly $2.1 billion. The e-commerce and cloud giant also has a long history of deploying AI. Amazon uses AI to surface relevant products for its online shoppers, recommend programming choices to its Prime Video and Music audience, determine the most efficient delivery routes for its e-commerce shipments, and plan inventory levels at its warehouses, among other uses. More recently, Amazon released generative AI tools to answer shoppers' questions and help sellers create compelling product descriptions.
Let's not forget Amazon Web Services (AWS), which launched Bedrock AI to offer the most popular generative AI models to its cloud customers. The company also created AI-specific chips -- dubbed Inferentia and Trainium -- to accelerate AI processing on AWS.
NASDAQ: AMZN
Key Data Points
The improving economic conditions are expected to be a boon to Amazon, and AI will no doubt play a part in its success. And at less than 3 times sales, the price is right.
Artificial intelligence stock No. 3: Taiwan Semiconductor Manufacturing -- 7.7% of holdings
Taiwan Semiconductor Manufacturing (TSM +0.75%), often referred to as TSMC, is the "world's largest and best semiconductor foundry," according to the company. Since state-of-the-art chips are the heart of AI processing, it isn't surprising that TSMC is Laffont's third-largest position. He added more than 1 million shares in the second quarter, increasing his holdings by 10%. Coatue's position now amounts to 11.4 million shares, collectively worth roughly $2 billion.
The accelerating adoption of AI has increased demand for the world's most advanced processors. TSMC dominates the semiconductor foundry space, with an estimated 62% of the market. More importantly, the company manufactures roughly 92% of the world's most advanced chips -- including most of the processors used for AI.
Given TSMC's pivotal role in the industry and the widespread belief that the AI revolution is still in its early stages, the next few years should provide a windfall for the company -- and its shareholders. And at just 25 times forward earnings, TSMC is still reasonably priced.
Artificial intelligence stock No. 4: Nvidia -- 6.6% of holdings
Nvidia (NVDA +2.21%) may well be the standard bearer for the AI revolution, so it's only natural it would figure prominently in Laffont's portfolio. Coatue trimmed its position by less than 1% during the second quarter, but the value of its holdings increased, thanks to 37% gains for Nvidia stock. Laffont now owns roughly 13.8 million shares worth $1.7 billion.
NASDAQ: NVDA
Key Data Points
The company's cutting-edge graphics processing units (GPUs) are already the gold standard for AI processing in data centers and cloud computing, having previously been the go-to for machine learning, an earlier branch of AI. Even with an estimated 90% market share, Nvidia isn't resting on its laurels and has accelerated its product release schedule to a one-year cadence. This dramatic increase in the pace of its chip development will make it even tougher for rivals to compete.
The triple-digit year-over-year growth Nvidia has delivered for five consecutive quarters is expected to decelerate this year but remain high by historical standards. Despite dominating the AI chip market, Nvidia stock is reasonably priced, with a price/earnings-to-growth ratio (PEG ratio) of less than 1 -- the standard for an undervalued stock.
Artificial intelligence stock No. 5: Microsoft -- 6.4% of holdings
Microsoft (MSFT +0.22%) was quick to enter the AI revolution, integrating AI across a broad cross-section of its products and services and offering a growing suite of AI models on its Azure Cloud platform. That's probably why it's Laffont's fifth-largest holding, one he increased by nearly 21,000 shares in Q2. The position now amounts to 3.7 million shares worth nearly $1.7 billion.
However, the company's biggest coup was likely the release of Copilot, its productivity-enhancing suite of AI-powered assistants. While Microsoft doesn't yet break out its results, some on Wall Street believe that Copilot -- and, more broadly, AI -- could generate as much as $100 billion in incremental revenue by 2027. It's also having an impact now, as Microsoft's proliferation of AI services is having a halo effect on its Azure Cloud, contributing 8 percentage points of growth in its most recent quarter.
The stock is selling for 31 times forward earnings which is an attractive price given Microsoft's growth potential.
Data by YCharts
All long-term winners
Each of these stocks is well known for dominating their respective industries, but it's their performance since the AI revolution kicked off early last year that really stands out. As you can see from the chart above, every one of Laffont's five top holdings have outperformed the S&P 500, and most by a wide margin.
Generative AI is expected to add between $2.6 trillion and $4.4 trillion to the global economy annually in the coming years, according to estimates compiled by global management consulting firm McKinsey & Company. Some estimates are much higher. Given their pivotal positions in the emerging AI industry, each of these stocks is worth a look.
