The artificial intelligence (AI) field is booming, with many corporations actively trying to make waves in this market. The most successful will reap immense financial rewards for themselves and their shareholders, but which ones will those be? Getting inspiration from the most famous and successful money managers on Wall Street might be helpful to pick promising AI stocks. One of them is David Tepper, the billionaire founder of Appaloosa Management.
The hedge fund owns several AI stocks worth serious consideration for investors, including Amazon (AMZN 2.61%) and Meta Platforms (META 2.33%). These two made up about 14% of the fund's portfolio as of the third quarter. Here's why both companies are worth investing in.
NASDAQ: AMZN
Key Data Points
1. Amazon
Amazon's business spans several industries, including video and music streaming, e-commerce and advertising, healthcare, grocery stores, and, of course, cloud computing. The tech giant offers a range of AI-related services through its cloud computing arm, Amazon Web Services (AWS). That includes its large language model, Bedrock; an AI assistant called Amazon Q; and much, much more than that. Cloud computing has been Amazon's most profitable segment for a while now.
AI is already helping improve it. In the third quarter, Amazon's sales increased 11% year over year to $158.9 billion. AWS' revenue increased by 19% year over year to $27.5 billion. Also, despite making just about 17% of Amazon's revenue, AWS accounted for 60% of its operating income. According to management, AWS has grown significantly in the last four quarters at the same time as the company's AI business is recording year-over-year revenue increases in the triple-digit percentages.
But there is still a vast runway for growth here. This is arguably still the early innings of this AI revolution. It could be a tailwind for Amazon for years to come, similar to how AWS, first launched in 2006, is now the company's most profitable segment. However, thanks to Amazon's diversified operations, it isn't just an AI play. Some investors are worried that pure-play AI companies will take a significant hit once the industry's growth inevitably slows.
Amazon is well equipped to deal with this potential issue. Here's another important aspect of Amazon's success: The company has a strong competitive advantage. To mention just two, AWS benefits from switching costs while its core e-commerce operations display strong network effects. There will always be competition, but a company with a competitive edge as strong as Amazon's should continue performing well despite it.
So, between its booming AWS unit, several opportunities in other segments, and its moat, Amazon is an outstanding stock to profit from AI.
NASDAQ: META
Key Data Points
2. Meta Platforms
Meta Platforms generates almost all of its revenue from advertisements. AI is having a direct impact on its business since the company has been using AI-powered algorithms to drive more traffic and engagement across its websites.
On Facebook and Instagram, Reels, or short-form videos, have become far more popular in recent years, partly thanks to this strategy. It has allowed Meta Platforms to compete with the high-flying TikTok. Meta Platforms also released generative AI tools to help companies create ads to launch on its websites, an approach that is bearing results.
Meta Platforms' AI-related work also includes its large language model, Llama, and its MetaAI virtual assistant, which now has more than 500 million active users. Meta Platforms' AI involvement and financial results helped drive the stock much higher this year while it continues to post strong financial results. The company's third-quarter revenue increased by 19% year over year to $40.6 billion. Meta's net income was $15.7 billion, 35% higher than the year-ago period.
Meta Platforms is planning on doubling down. The company projected that it would invest even more in AI-related infrastructure next year.
While the market was initially not too happy about this news, in my view, it could be a great move. Meta Platforms ended the third quarter with 3.29 billion daily active users, an increase of 5% year over year. With an ecosystem that vast and a network effect across some of its websites and apps (Facebook and Instagram in particular), Meta Platforms can seek endless ways to monetize its users. The payoff from these investments could be more than worth it. And that's before you consider other growing sources of revenue for Meta Platforms, such as paid messaging on WhatsApp.
In short, there is plenty of growth fuel left for Meta Platforms, with AI leading the way. The tech giant represents another great way to cash in on this increasingly important industry.
