When it comes to investing in artificial intelligence (AI), there’s one stock that’s definitely hard to ignore Nvidia (NASDAQ: NVDA). The company almost single-handedly started the AI revolution by developing the graphics processing units (GPUs) that make AI possible. The results of Nvidia’s fiscal 2024 (ending January 28) illustrate its undisputed success. Revenue of $61 billion rose 126% year over year, while diluted earnings per share (EPS) of $11.93 rose 586%.
I have no doubt 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 the example of a successful money manager could provide ideas.
Billionaire Daniel Loeb made waves as CEO of Third Point, the hedge fund he founded in 1995. Loeb managed to build a starting capital of just $3.4 million into a financial empire worth $6.6 billion. He has made no secret of his feelings towards AI, which he considers “transformational” and believes a “profound economic upheaval” is coming. 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 called Nvidia.
Number 1 share in artificial intelligence: Microsoft – 11.5% of shares
Microsoft (NASDAQ: MSFT) deserves at least partial credit for helping fuel the AI revolution by integrating AI into a wide range of its cloud and software offerings. There may be no greater potential opportunity for the company than that of Copilot, Microsoft’s AI-powered digital assistant. Copilot offers a range of tools that help automate and streamline mundane and time-consuming tasks, increasing productivity. According to Microsoft, demand has been off the charts and users seem to love it.
Loeb has been incredibly optimistic and hasn’t minced words about its potential. “Microsoft’s introduction of its AI-enabled Office Copilot software…could increase its revenues by as much as $25 billion or more from software sales alone.”
Third Point trimmed about 9% of its position in Microsoft in the fourth quarter, even as the value of the position rose – thanks in part to the stock’s 19% gain during the quarter.
Microsoft shares sold for a modest premium of 34 times earnings, but the company is only just beginning to reap the benefits of its AI strategy, and Loeb clearly believes it’s worth every penny — and so do I.
Artificial Intelligence Stock No. 2: Amazon – 9.7% of shares
Loeb is a big believer in it Amazon (NASDAQ: AMZN), in which he first invested years ago. At the beginning of 2022, he provided insight into his thinking. At the time, the company’s market capitalization was $1.6 trillion, and Loeb believed the company had $1 trillion in “untapped value”. He estimated that the e-commerce segment alone was worth over $1 trillion, while Amazon Web Services (AWS) – the 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 that the “most immediate consequence” of the rapid adoption of generative AI is that there will be “an acceleration in the use of the cloud” to leverage the large language models that underpin AI – including those offered by Microsoft Azure, AWS and Alphabet‘s Google Cloud. He called cloud services the “guns and shovels” of the AI gold rush and should benefit regardless of which products ultimately “strike gold.”
Loeb has also cut his shares in Amazon by about 10%, but like Microsoft, the total value of his stake has actually increased, thanks to a 20% increase in Amazon’s stock price in the fourth quarter.
However, with less than three times sales by 2023, Amazon was and is attractively priced.
Artificial Intelligence Stock No. 3: Metaplatforms – 6.2% of shares
Loeb’s substantial position Metaplatforms (NASDAQ: META) is at least partially explained by the ongoing recovery in the digital advertising market, but the company also has significant opportunities when it comes to AI. Loeb initiated a position in the third quarter and expanded it in the fourth quarter. Meta has long used AI to deliver relevant content to its social media users and to more accurately target the ads that generate the lion’s share of revenue.
More recently, Meta unveiled the next generation of its Large Language Model Meta AI (LLaMA), which is available for rent on all major cloud infrastructure services. While we don’t yet know the significance of the impact on Meta’s bottom line, it does represent a new revenue stream for the company.
While Loeb is silent on its rationale, Meta meets Loeb’s criteria of investing in “high quality companies trading at reasonable valuations.” And when the sun set on 2023, Meta Platforms shares sold for just 24 times earnings, a discount to a multiple of 26 for the S&P500.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet, Amazon, Meta Platforms, Microsoft and Nvidia. The Motley Fool holds positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Forget Nvidia: Billionaire Daniel Loeb Owns $2.2 Billion Worth of These 3 Artificial Intelligence (AI) Stocks was originally published by The Motley Fool
