While Nvidia is currently leading the AI revolution, the stock simply isn’t for everyone.
There’s no getting around it: The oncoming storm of artificial intelligence (AI) is only just beginning, and the flag-bearer for this shifting paradigm is Nvidia (NVDA 0.69%). The company has become virtually unforgettable as a key player in the AI revolution thanks to its gold-standard graphics processing units (GPUs), which provide the computational horsepower that underpins AI.
If you have any doubts, consider this: For the company’s fiscal 2025 first quarter (ended April 28), record revenue of $26 billion soared 262% year over year, while its diluted earnings per share (EPS) of $5.98 surged 629%.
Yet, as the AI revolution gains steam, some investors are questioning Nvidia’s staying power, concerned with the onset of competition and a rich valuation. As a result, some investors have already moved on from the chipmaker in search of the “next big thing” in AI. Perusing the holdings of a highly successful hedge fund manager might provide food for thought.
Billionaire Daniel Loeb is one such money manager, having made a name for himself as the CEO of Third Point, which he founded in 1995. From humble beginnings and starting capital of just $3.4 million, Loeb parlayed his seed money into assets under management of nearly $7.8 billion.
He’s been crystal clear regarding his opinion on the potential of AI. He believes it will be “transformational,” providing the catalyst for a “profound economic upheaval.” Loeb believes so strongly in AI that it’s the “key element” in the thesis of nearly half the fund’s stock holdings.
Three are by far his largest AI holdings.
Artificial intelligence stock No. 1: Amazon — 11.8% of holdings
Third Point is heavily invested in Amazon (AMZN 1.47%), having held a stake in the e-commerce and cloud kingpin for years. Loebe waxed poetic about the vast potential of Amazon in an interview in 2022. While the company was then valued at roughly $1.6 trillion, Loeb believed Amazon possessed $1 trillion in “untapped value.” He argued that the online retail segment alone was worth more than $1 trillion, while its cloud infrastructure segment, Amazon Web Services (AWS), was worth $1.5 trillion.
Loeb recently suggested that the “most direct consequence” of the rapid adoption of AI is “an acceleration in cloud usage” for businesses looking to leverage the large language models that form the foundation of generative AI. This includes the big three cloud providers — Microsoft (MSFT 1.64%) Azure, AWS, and Alphabet’s Google Cloud. He further believes these cloud services are the “‘picks and shovels’ of the AI gold rush and should benefit regardless of which products ultimately ‘strike gold.'”
Loeb increased his Amazon holdings by roughly 21% in the first quarter, bringing his total stake to 5.1 million shares worth about $930 million and nearly 12% of Third Point’s portfolio. Furthermore, at roughly 3 times forward sales, Amazon is still attractively priced.
Artificial intelligence stock No. 2: Microsoft — 9.5% of holdings
Microsoft (MSFT 1.64%) is widely credited with helping to kick off the mad dash to AI adoption, as the company was quick off the mark to integrate AI across a broad cross-section of its products and services.
The poster child for those efforts is Microsoft Copilot, the company’s AI-fueled digital assistant. Copilot offers a suite of functionality that helps to streamline and automate time-consuming chores, boosting productivity in the process. Not only is demand for Copilot robust, but AI is also helping increase market share for Microsoft’s Azure cloud.
While the company has thus far been mum about how much incremental revenue Copilot has generated, Loeb estimates that “Copilot software … could increase [Microsoft’s] revenues by as much as $25 billion or more on software sales alone.”
Third Point trimmed its Microsoft position by about 12% in the first quarter, even as the total value of its position increased — thanks to a dividend payment and the stock’s 12% move higher in Q1.
Microsoft stock was currently selling for a premium at 36 times earnings. That said, the company is already one of the early beneficiaries of the AI revolution and has positioned itself for further gains.
Artificial intelligence stock No. 3: Meta Platforms — 7.7% of holdings
The ongoing recovery of the digital advertising market likely factored into Loeb’s considerable position in Meta Platforms (META 2.71%), but the company has also established itself as a dark horse candidate in AI.
Meta has a distinguished history of using AI to surface relevant content to users on its various social media platforms and target the advertising that generates 98% of the company’s revenue.
Meta’s current efforts are focused firmly on the future. The company recently debuted the latest version of its Large Language Model Meta AI (LLaMA), which is available on each major cloud infrastructure platform, paying Meta a fee to carry it.
With billions of daily users on its social media platforms, the company boasts a treasure trove of data to train its AI systems, which have been gaining popularity. Furthermore, this is an entirely new revenue stream for Meta, though the impact on its financial results isn’t yet clear.
Third Point initiated a position in Meta during the third quarter of 2023 and has increased his holdings each quarter since that time, recently boosting his position by 7%. That brings Third Point’s stake to 1.24 million shares worth $577 million and nearly 8% of the hedge fund’s holdings.
Loeb hasn’t said much about his Meta position except to point out that it was the fund’s biggest winner in the first quarter. That said, Loeb focuses on “high-quality companies trading at reasonable valuations,” and Meta certainly qualifies using those criteria. The stock currently sells for less than 27 times earnings, a discount compared to a multiple of 29 for the S&P 500.
