Table of Contents
Dan Loeb is the founder and CEO of Third Point, an institutional asset manager whose flagship Offshore Fund has returned 13.1% annually since its inception in 1996. S&P500 (SNPINDEX: ^GSPC) has returned 9.4% annually over the same period.
Loeb is, he says, “one of the most successful hedge fund managers of his generation.” The Wall Street Journal. And while Third Point underperformed in 2022 and 2023, its long-term outperformance makes Loeb a good case study for investors.
Loeb has compared artificial intelligence (AI) to disruptive technologies such as the internet and smartphones, and AI is a common theme in his investments. Somewhat surprisingly, Third Point has no position on this Nvidiabut as of June, the company had 23.1% of its $8.7 billion portfolio invested in three AI stocks:
-
Amazon (NASDAQ: AMZN): 11%
-
Microsoft (NASDAQ: MSFT): 8.1%
-
Taiwanese semiconductor (NYSE: TSM): 4%.
Here’s what investors need to know.
Amazon: 11% of Dan Loeb’s portfolio
Amazon operates the largest e-commerce marketplace in North America and Western Europe. The company has used the scope of its retail operations to secure a strong presence in digital advertising. But it is the biggest opportunity to make money artificial intelligence (AI) lies in being cloud computing company, Amazon Web Services (AWS).
AWS is a leader in cloud infrastructure and platform services, and its market share increased by one percentage point between the first and second quarters of 2024. That scale means AWS is uniquely positioned to benefit from AI simply because it already has such a large customer base. and they are more likely to rely on AWS for AI services when/if needed, rather than working with a new cloud provider.
AWS has also expanded its AI monetization capabilities with new products such as coding assistant Amazon Q and generative AI development platform Amazon Bedrock. CEO Andy Jassy recently told analysts, “Our AI business continues to grow dramatically, with multi-billion dollar revenues, despite being in its infancy.”
Looking ahead, Wall Street expects Amazon’s profits to rise 25% annually through 2025. That makes the current valuation of 44 times earnings acceptable. I think this is a reasonable entry point for patient investors, and I would feel comfortable buying a small position in this stock today.
Microsoft: 8.4% of Dan Loeb’s portfolio
Microsoft generates revenue from AI within its software and cloud businesses. New generative AI copilots for business productivity and enterprise resource planning platforms are gaining traction. The number of employees using Copilot for Microsoft 365 on a daily basis nearly doubled last quarter, and the total number of customers increased by more than 60%.
Microsoft Azure is steadily gaining market share in cloud services thanks to its strength in cybersecurity, analytics and artificial intelligence. The collaboration with OpenAI has played an important role in attracting new customers. Azure is the only public cloud that allows developers to build generative AI applications with the major language models that power ChatGPT.
Loeb wrote in a recent letter to investors: “This new technology benefits incumbents who are deploying their financial and intellectual war chests to win the AI arms race. Right now, what we see as the best-managed ‘legacy’ companies like Microsoft and Amazon (both of which we own) have built enormous competitive advantages and seen their growth vectors accelerate.”
Wall Street expects Microsoft’s revenues to grow 13% annually through fiscal 2026 (end of June 2026). That makes the current valuation of 36 times earnings quite expensive. I think Microsoft is a well-managed company with attractive growth prospects, but at the current price I would avoid the stock.
Taiwan Semiconductor: 4% of Dan Loeb’s portfolio
Taiwan Semiconductor Manufacturing Company, or TSMC, is the largest semiconductor foundry by revenue. This gives the company an important advantage in a capital-intensive sector. TSMC’s ability to outperform peers in R&D keeps the company on the cutting edge of semiconductor manufacturing technology, also known as process technology.
Felix Lex op Morning star highlighted that benefit in a recent note. To paraphrase his comment, leadership in process technology means that TSMC consistently improves chip PPA (power, performance and area), cost per chip and time to market, all of which are essential for computing devices to remain competitive are. It also lets TSMC charge higher prices than its peers.
TSMC’s leadership in process technology has also won the company high-profile customers Apple, AMDNvidia, QualcommAnd Broadcomthat designs custom semiconductors itself Alphabet‘s Google and Metaplatforms. All of these companies are spending heavily on artificial intelligence, which benefits TSMC.
Dan Loeb explained his investment thesis in a recent investor letter:
Google was the first to introduce custom accelerators with the TPU almost a decade ago, and today this is already a multi-billion dollar business for TSMC. Amazon, Microsoft and Meta have all followed Google’s lead and announced (and in the case from Amazon) While these products are already in mass production, we see TSMC’s AI revenue increasing multiples in the coming years.”
Looking ahead, Wall Street expects TSMC to achieve 29% annual earnings growth through 2025. That makes the current valuation of 31 times earnings reasonable. I would feel comfortable buying a small position in this stock today.
Should You Invest $1,000 in Amazon Now?
Before you buy stock in Amazon, consider this:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Amazon wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $729,857!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns September 16, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. 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. Trevor Jennevine has positions in Amazon and Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has one disclosure policy.
Billionaire Dan Loeb has invested 23% of his portfolio in 3 AI stocks (Hint: not Nvidia) was originally published by The Motley Fool