Billionaire Dan Loeb has 23% of his portfolio invested in 3 AI stocks (hint: not Nvidia)

Dan Loeb is the founder and CEO of Third Point, an institutional asset manager whose flagship Offshore fund has gained 13.1% annually since its inception in 1996. Meanwhile, S&P 500 (^GSPC 0.13%) it returned 9.4% annually over the same period.

Loeb is “one of the most successful hedge fund managers of his generation,” according to him The Wall Street Journal. And while Third Point underperformed in 2022 and 2023, its long-term performance makes Loeb a good case study for investors.

Loeb has compared artificial intelligence (AI) to disruptive technologies like the Internet and smartphones, and AI is a prevalent theme in his investments. Somewhat surprisingly, Third Point does not have a position in the Nvidiabut it had 23.1% of its $8.7 billion portfolio invested in three AI stocks in June:

• Amazon (AMZN -0.86%): 11%
• Microsoft (MSFT 0.17%): 8.1%
• Taiwan Semiconductor (TSM -1.98%): 4%.

Here’s what investors should 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 business to secure a strong presence in digital advertising. But its biggest opportunity to make money from artificial intelligence (AI) lies in its cloud computing business, Amazon Web Services (AWS).

AWS is the leader in cloud infrastructure and platform services, and its market share grew by one percentage point between the first and second quarters of 2024. This scale means that AWS is uniquely positioned to benefit from AI simply because it already has such a large customer base. and 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 ability to monetize AI with new products such as the Amazon Q coding assistant and the Amazon Bedrock generative AI development platform. CEO Andy Jassy recently told analysts, “Our AI business continues to grow dramatically at a multibillion-dollar revenue rate despite being so early.”

Looking ahead, Wall Street expects Amazon’s earnings to grow 25% annually through 2025. That makes the current valuation of 44 times earnings seem tolerable. 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 is monetizing AI across its software and cloud businesses. New generative AI co-pilots for business productivity and enterprise resource planning platforms are gaining ground. The number of workers using Copilot for Microsoft 365 on a daily basis nearly doubled in the most recent quarter, and the total number of customers grew by more than 60%.

Microsoft Azure is steadily gaining share in cloud services due to the strength of cybersecurity, analytics and artificial intelligence. Its partnership with OpenAI has been instrumental in attracting new customers. Azure is the only public cloud that enables developers to build generative AI applications with the large language models that power ChatGPT.

Loeb wrote in a recent investor letter: “This new technology favors operators deploying their financial and intellectual war chests to win the AI ​​arms race. Today, what we see as the best ‘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 earnings to grow 13% annually through fiscal 2026 (ending June 2026). That makes the current valuation of 36 times earnings look pretty expensive. I think Microsoft is a well-run company with compelling growth prospects, but I’d avoid the stock at its current price.

Taiwan Semiconductor: 4% of Dan Loeb’s portfolio

Taiwan Semiconductor Manufacturing Company, or TSMC, is the largest semiconductor foundry as measured by revenue. This gives the company an important advantage in a capital-intensive industry. TSMC’s ability to outspend peers in research and development keeps it at the cutting edge of semiconductor manufacturing technology, sometimes called process technology.

Felix Lex at Morningstar pointed out this advantage in a recent note. To paraphrase the comment: Process technology leadership means that TSMC is constantly improving chip PPA (power, performance and area), cost per chip and time to market, all of which are essential for computing devices to be competitive. It also allows TSMC to charge higher prices than its peers.

TSMC’s leadership in process technology has also won the company high-profile customers Apple, AMDNvidia, Qualcommand Broadcomwhich itself designs custom semiconductors for Alphabetof Google and Meta platforms. All of these companies are spending heavily on artificial intelligence, which TSMC is benefiting from.

Dan Loeb explained his investment thesis in a recent investor letter:

“Google was the first to develop custom TPU accelerators almost 10 years 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 Amazon’s case already mass produced) their own chips As these products expand, we see TSMC’s AI revenue grow by more in the coming years.

Looking ahead, Wall Street expects TSMC to grow earnings by 29% annually through 2025. That makes the current valuation of 31 times earnings seem reasonable. I would feel comfortable buying a small position in this stock today.