Billionaire Investor David Tepper Has 28% of His Portfolio Invested in 3 Brilliant AI Growth Stocks
Billionaire David Tepper runs Appaloosa Management, a hedge fund that has regularly outperformed industry peers and the broader stock market since it was founded in 1993. Indeed, Appaloosa beat the S&P 500 (SNPINDEX: ^GSPC) by 15 percentage points over the last three years. That suggests Tepper and his fund's investment choices are worth studying.
As of the September quarter, Tepper had 28.2% of his Appaloosa portfolio invested in just three artificial intelligence (AI) stocks: 8.8% in Nvidia (NASDAQ: NVDA), 9.4% in Amazon (NASDAQ: AMZN), and 10% in Microsoft (NASDAQ: MSFT). That level of asset allocation is a clear sign of high conviction.
Here's what investors should know about these three brilliant AI stocks.
1. Nvidia
Nvidia has a strong presence in two semiconductor markets: graphics chips for gaming and professional design and data center accelerators (graphics processing units or GPUs) for complex workloads like scientific computing and artificial intelligence (AI). Nvidia holds more than 95% market share in workstation graphics, and it holds 80% to 95% market share in AI computing.
Nvidia has extended its ability to monetize both markets with subscription software and cloud services. Omniverse is a virtual design and simulation platform for developing 3D and robotics applications, as well as training autonomous vehicles. DGX Cloud is an AI application development platform comprising infrastructure, software, and pre-trained machine learning models. Many investors mistakenly see Nvidia as nothing more than a chipmaker, but that description fails to account for its growing software and services business. CFRA analyst Angelo Zino says Nvidia's "software capabilities provide an incredible competitive moat."
In recent years, Nvidia has broadened its data center portfolio with networking platforms and central processing units (CPUs), both purpose-built for AI workloads. Networking revenue nearly tripled over the past year, and Nvidia is well positioned to take share in CPUs given that it holds 95% market share in data center GPUs.
Going forward, the graphics processor market is forecast to increase by 28% annually through 2030, while the AI market is forecast to increase by 37% annually during the same period. That gives Nvidia a good shot at annual sales growth exceeding 25% through the end of the decade. Even in that context, its current valuation of 30.4 times sales looks pricey, but I think patient investors willing to hold the stock for at least five years can buy a small position today.
2. Amazon
Amazon has a strong presence in three markets: e-commerce, digital advertising, and cloud computing. Specifically, it operates the largest online marketplace in North America and Western Europe as measured by sales volume. Amazon is also the largest retail advertiser in the U.S. and the third-largest ad tech company in the world. And Amazon Web Services (AWS) is the largest provider of cloud infrastructure and platform services.
That last point is particularly relevant. To quote Argus analyst Jim Kelleher, "As the leading provider of infrastructure-as-a-service and other cloud services, AWS is uniquely positioned in the burgeoning AI-as-a-service market." Indeed, the company is a recognized leader in cloud AI developer services, and its product pipeline is packed with AI innovations.
Amazon Bedrock became generally available in September. That service provides pre-trained machine learning models and development tools that help businesses build generative AI applications. More recently, the company announced Amazon Q, a generative AI business assistant that can create content and surface insights across data sources and enterprise systems like Microsoft SharePoint, Salesforce, and ServiceNow.
Going forward, retail e-commerce sales are forecast to increase by 8% annually through 2030, while the ad tech and cloud computing markets are forecast to expand by 14% annually during the same period. That gives Amazon a good shot at double-digit annual sales growth through the end of the decade, which makes its current valuation of 2.9 times sales look quite reasonable.
3. Microsoft
Microsoft has a strong presence in two markets: enterprise software and cloud computing. The company accounts for more than 16% of software-as-a-service spending, nearly double the market share of its closest competitor, due to its leadership position in office productivity and enterprise resource planning (ERP) software. Similarly, Microsoft Azure accounts for 23% of cloud infrastructure and platform services spending, second only to Amazon Web Services.
Microsoft is adding AI capabilities to its enterprise software to create new monetization opportunities. Microsoft 365 Copilot is a generative AI assistant that automates workflows across office productivity applications like Word, PowerPoint, and Excel. Similarly, Copilot for Dynamics 365 automates workflows across ERP applications for sales, marketing, customer service, and supply chain management.
Microsoft is also investing heavily in AI across its cloud computing business. Azure is the exclusive cloud provider for OpenAI, and it's the only cloud platform that provides access to pre-trained models from OpenAI, including the GPT models that power ChatGPT. Businesses can use those models to build custom generative AI applications. JPMorgan Chase analysts believe "Microsoft's investment into OpenAI, which started years ago, could potentially prove to be some of the best money ever spent."
Going forward, enterprise software-as-a-service and cloud computing sales are forecast to grow at 14% annually through 2030. That gives Microsoft a good shot at double-digit sales growth through the end of the decade. In that light, its current valuation of 13.3 times sales looks a bit pricey. I think patient investors can buy a small position today, but waiting for a cheaper price may be the most prudent course of action.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Amazon, JPMorgan Chase, Microsoft, Nvidia, Salesforce, and ServiceNow. The Motley Fool has a disclosure policy.
Billionaire Investor David Tepper Has 28% of His Portfolio Invested in 3 Brilliant AI Growth Stocks was originally published by The Motley Fool
