Multi-billionaire David Tepper manages Appaloosa Management, the hedge fund he established in 1993, and has been one of the most outstanding stars on Wall Street for a long time. He has been labeled “possibly the best hedge fund manager of his generation” by Forbes. Tepper has “regularly surpassed his industry colleagues and the broader global markets since [Appaloosa’s] commencement,” according to Tepper’s bio published by Carnegie Mellon University.
Throughout the past three years, Appaloosa has exceeded the S&P 500 by 15%, a significant accomplishment, considering the macroeconomic background. His impressive history indicates that Tepper’s stock choices might be deserving of more thorough analysis.
Investors may be taken aback to learn that, to cap off the third quarter, Tepper possessed a significant 47.1% of Appaloosa’s portfolio invested in merely five artificial intelligence (AI) stocks:
- Meta Platforms (META 0.24%): 11.6%
- Microsoft (MSFT -0.23%): 10.2%
- Amazon (AMZN 0.87%): 9.4%
- Nvidia (NVDA -0.95%): 8.8%
- Alphabet (GOOGL 0.21%) (GOOG 0.10%): 7.2%
Let’s inspect Tepper’s five leading selections to understand why he has such a substantial stake in these AI stocks.
1. Meta Platforms
A surprising decision, Meta Platforms has a long history of utilizing AI to fortify its business. The majority of Meta’s income derives from digital advertising, and AI can more precisely bring to the surface relevant advertising and other content on its social media sites.
As the world’s second-largest digital advertiser, the recent recovery in ad spending has bolstered the company’s prospects. Moreover, Meta has introduced several AI-driven tools designed to assist advertisers in connecting more accurately with their target market. Equally important, the company developed a leading open-source AI model — Llama (Large Language Model Meta AI) — available on all the major cloud infrastructure platforms, creating an entirely new source of revenue for the company.
At just 20 times forward earnings, Meta is selling at a discount compared to the broader market — a factor that likely influenced Tepper’s investment choice.
Microsoft anticipated the future and invested $13 billion in ChatGPT creator OpenAI in recent years, highlighting the potential for generative AI. Its big tech competitors promptly followed suit, ramping up the demand for AI. The tech juggernaut reacted to the increasing demand by integrating AI functionality across its expansive range of software-as-a-service (SaaS) offerings. Moreover, all the most well-liked AI models are available on Azure Cloud.
The most significant development, however, was the introduction of Microsoft Copilot, its AI assistant. Its ability to heighten user productivity has led to strong demand and has the potential to generate additional revenue of $100 billion by 2027, as per analyst estimates. Azure’s growth outpaced the competition in the third quarter, and Microsoft highlighted that three percentage points of that growth was due to rising demand for AI.
Microsoft is currently trading at 31 times forward earnings. While that’s a slight premium to the market, the company’s robust legacy businesses and the opportunity presented by AI make Microsoft a bargain at this price, which likely did not escape Tepper’s observation.
Although some perceived Amazon as slow to enter the AI arena, it has made bold strides into the AI space. The company has long utilized AI to manage product recommendations, inventory levels, delivery routes, and more.
Yet this is just the tip of the iceberg for Amazon’s AI prospects. The company is now leveraging generative AI to enhance product listings, create review summaries, and refine advertising. It’s also developing an AI-powered tool that can respond to questions about specific products.
Amazon Web Services (AWS) provides an expanding variety of popular generative AI models, including several proprietary ones via its Bedrock AI. It has also unveiled several AI-centric chips, such as Inferentia and Trainium, designed to accelerate AI processing for AWS customers.
Following its strong rebound last year, Amazon is still selling for just 2 times forward sales, a mark of an underpriced stock, which likely attracted Tepper’s interest.
No conversation about AI stocks would be complete without acknowledging Nvidia, a point signaled by Tepper’s position. Nvidia pioneered the graphics processing units (GPUs) that transformed gaming and are the gold standard for AI applications.
Nvidia’s processors have dominated the market in data centers and machine learning, commanding an estimated 95% share in each. The company’s experience in the field enabled Nvidia to swiftly pivot to address the burgeoning demand for generative AI.
Rivals are scrambling to develop competing processors, but Nvidia continues to maintain its superiority. For the nine months ended Oct. 29, 2023, Nvidia expended $6.2 billion, or 16% of its total revenue, on research and development. The company’s track record of sustained innovation will make it challenging to unseat.
Despite the stock’s recent rise, Nvidia is still remarkably inexpensive, sporting a price/earnings-to-growth ratio (PEG ratio) of less than 1 — a benchmark for an undervalued stock — of which Tepper was assuredly aware.
Like Meta Platforms, Alphabet earns the majority of its revenue from digital advertising, driven by Google Search. The company has a remarkable track record of implementing AI to enhance its search algorithms and ad targeting, and the recovering ad market will undoubtedly improve the company’s results.
Alphabet didn’t overlook the potential of generative AI. The company integrated AI functionality into many of its flagship Google and Android products. As one of the Big Three cloud providers, it was able to expand the number of AI systems available to its Google Cloud customers.
Its most recent offering, Gemini AI, is being hailed by the company as its “largest and most capable AI model,” outperforming rivals using a variety of widely used benchmarks. Furthermore, Alphabet’s Vertex AI provides access to 130 foundational AI models with something for just about every use case.
Despite the company’s resurgence over the past year, Alphabet is still trading for just 19 times forward earnings, a valuation that likely caught Tepper’s eye.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, 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. Suzanne Frey, an executive at Alphabet, 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 has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.