Billionaires are selling it and buying two top artificial intelligence (AI) stocks instead.

By | April 4, 2024

Chipmaker Nvidia (NASDAQ: NVDA) has created significant shareholder value in recent months. The stock is up 517% since the start of 2023, amid rising interest in artificial intelligence (AI). But several billionaire hedge fund managers sold their positions in Nvidia in the fourth quarter, while buying other AI stocks.

  • Israel Englander of Millennium Management sold 1.7 million shares of Nvidia, reducing his stake by 45%.

  • Steven Cohen of Point72 Asset Management sold 1.1 million shares of Nvidia, reducing his stake by 66%.

  • Appaloosa’s David Tepper sold 235,000 shares of Nvidia, reducing his stake by 23%.

These three billionaires have two important qualities in common. They are among the 15 most successful hedge fund managers in history, beating the S&P500 (SNPINDEX: ^GSPC) in the past three years. These qualities lend them credibility.

With that in mind, all three hedge fund managers bought shares of Amazon (NASDAQ: AMZN) in the fourth quarter. Englander and Tepper also started positions HubSpot (NYSE: HUBS). These companies have already achieved a strong presence in certain AI markets – Amazon in cloud AI developer services and HubSpot in AI sales assistant software – but both are leaning into AI product development in ways that could create more shareholder value.

1. Amazon

Amazon has three key growth drivers in e-commerce, digital advertising and cloud computing, and the company operates from a strong position in all three markets. To explain this further, Amazon runs the most visited online marketplace in the world, which of course has made it the largest retail advertiser in the world. Meanwhile, Amazon Web Services (AWS) is a leader in cloud infrastructure and platform services, as well as in several subcategories, including artificial intelligence (AI) developer services.

Amazon is leaning on AI to improve its position in all three markets. The company recently launched a generative AI shopping assistant called Rufus, using machine learning to optimize inventory and delivery routes for its logistics operations. Amazon also introduced a generative AI tool that creates marketing content for advertisers, and the company is continually adapting its machine learning models to make product recommendations more relevant.

Finally, AWS has made its cloud platform more attractive with two new products: Bedrock is a service for customizing large language models and building generative AI applications, and Amazon Q is a generative AI business assistant that queries data from various internal and external sources and summarizes. . CEO Andy Jassy believes that generative AI alone will “generate tens of billions of dollars in revenue for Amazon in the coming years.”

Amazon reported strong financial results in the fourth quarter, exceeding expectations on the top and bottom lines. Revenue increased 14% to $170 billion, operating margin increased for the seventh consecutive quarter and non-GAAP net income improved to $1.00 per diluted share, compared to $0.03 per diluted share the prior year.

Going forward, Amazon has a good chance of double-digit revenue growth through the end of this decade. I’m saying that because retail e-commerce sales are expected to grow 8% annually, the digital advertising market is expected to grow 15% annually, and the cloud computing market is expected to grow 14% annually through 2030 years will grow.

Wall Street analysts have similar expectations. The consensus calls for Amazon to grow revenue 11% annually over the next five years. That makes the current valuation of 3.3 times sales reasonable. Investors should consider buying a small position in this stock today, especially as part of a larger basket of AI stocks.

2. HubSpot

HubSpot specializes in CRM (Customer Relationship Management) software. The platform includes applications for marketing, sales, customer service and operations teams, as well as commerce and content management tools. These products help companies generate leads, convert leads into customers, and maintain lasting relationships with those customers.

HubSpot designed its CRM platform with small and medium-sized businesses in mind. Customers in that underserved market segment find the user-friendly interface, simple software and freemium pricing attractive. As a result, HubSpot has achieved a strong presence in several product categories, especially sales and marketing software. Indeed, Morning star sees HubSpot as a leader in both spaces and IT consultancy Gartner recently recognized its leadership in marketing automation software, highlighting investments in AI as a key differentiator.

HubSpot delivered a solid fourth-quarter financial report, exceeding expectations on both the top and bottom lines. Customer numbers increased by 23% to the top 205,000, while average subscription revenue per customer increased by one percentage point. In turn, revenue rose 24% to $582 million, driven by particularly strong momentum in sales software, and non-GAAP net income rose 53% to $98 million.

In the future, HubSpot plans to drive adoption of higher-end products by adding more advanced functionality and attracting larger companies. To achieve that, the company is introducing a range of AI capabilities in the first half of this year, most of which are exclusive to higher-end product tiers. These capabilities include predictive AI for sales forecasting and content recommendations, as well as generative AI for marketing copy and content summaries.

Wall Street expects HubSpot to grow revenue 17% annually over the next five years, but that estimate leaves room for upside potential. HubSpot is a recognized leader in AI sales assistant software for small businesses, and continued investments in AI can be a powerful growth driver. That said, the current valuation of 14.4 times sales seems reasonable, even if the Wall Street consensus is correct. Now is a good time for long-term investors to buy a small position in this growth stock.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennevine has positions at Amazon and Nvidia. The Motley Fool holds and recommends positions in Amazon, HubSpot, and Nvidia. The Motley Fool has a disclosure policy.

Forget Nvidia: Billionaires are selling it and buying two top artificial intelligence (AI) stocks instead was originally published by The Motley Fool

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