Billionaires sell Nvidia shares and buy two artificial intelligence (AI) stocks that are highly valued by Wall Street

Artificial intelligence (AI) has been a hot investment topic for nearly two years and Nvidia was one of the most popular ways to play that theme. But the billionaire hedge fund managers below sold shares of Nvidia in the second quarter and shifted capital to two other AI stocks, Amazon (AMZN -3.06%) and Taiwan Semiconductor (TSM 1.85%).

• Ken Griffin of Citadel Advisors sold 9.2 million shares of Nvidia, reducing his stake by 79%. He also added 1.1 million Amazon shares and 633,897 Taiwan Semiconductor shares. Amazon is now the largest holding, excluding options and index funds.
• Coatue Management’s Philippe Laffont sold 96,963 Nvidia shares, reducing its stake by 1%. He also acquired 702,235 shares of Amazon and 1.1 million shares of Taiwan Semiconductor, which are now the second and third largest, respectively.

Of course, the second quarter ended on June 30, so the transactions detailed above took place months ago. However, Amazon and Taiwan Semiconductor are still recommended by Wall Street:

• Of the 65 analysts following Amazon, 95% rate the stock a buy and the remaining 5% rate the stock a hold. The average target price of $220 per share implies an upside of 18% from the current share price of $187.
• Among the 44 analysts following Taiwan Semiconductor, 98% rate the stock a buy and the remaining 2% rate the stock a hold. The average price target of $209 per ADR implies a 15% upside from the current price of $181.

Here’s what investors should know about Amazon and Taiwan Semiconductor.

1. Amazon

Amazon operates the world’s most popular online marketplace in terms of monthly visitors, and the company has reinforced its leadership with a robust logistics network. Dominance in retail has helped Amazon become the third-largest ad tech company in the United States, and could overtake second place. Meta platforms by the end of the decade, according to eMarketer.

Beyond retail and advertising, Amazon Web Services (AWS) is a market leader in cloud infrastructure and platform services, which places the company in a unique position when it comes to artificial intelligence (AI). With the largest community of customers and partners in public clouds, AWS has more monetization and upsell opportunities than its rivals. And consulting Gartner recently recognized AWS as a leader in cloud AI development services.

Amazon reported mixed financial results in the second quarter. Revenue rose 10% to $148 billion, well missing estimates. But GAAP net income rose 94% to $1.26 per share, beating expectations. Stocks fell following the report, partly because sales grew more slowly than expected and partly because management provided somewhat conservative guidance for the third quarter.

However, Amazon has a strong presence in three larger markets, and Wall Street expects the company’s earnings to grow 22% annually over the next three years. That makes the current valuation of 44 times earnings look relatively reasonable. These numbers give a PEG ratio of 2, which is a discount to the three-year average of 2.9. Patient investors should consider buying some shares today.

2. Taiwan Semiconductor Manufacturing Company

Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest dedicated chip manufacturer or foundry. It bears the costs associated with making chips for other companies. TSMC accounted for 62 percent of foundry revenue in the June quarter, up 4 percentage points from a year earlier, according to Counterpoint Research.

This scale gives the company a significant advantage. It supports the aggressive capital spending needed to keep TSMC on the cutting edge of semiconductor manufacturing, also called process technology. Heavy R&D spending, along with engineering expertise, enables the company to consistently build smaller, faster, and more energy-efficient chips.

TSMC has more than 90 percent market share in the most advanced process technologies, the 3-nanometer and 5-nanometer nodes, according to analysts. And management says its 2-nanometer node will reach volume production in 2025. Industry leadership gives TSMC pricing power and has made the company the AI ​​chipmaker of choice for customers such as Apple, Broadcomand Nvidia.

TSMC reported strong financial results in the second quarter. Revenue rose 32% to $20.8 billion and earnings rose 30% to $1.48 per ADR. “Our second quarter business was supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by continued smartphone seasonality,” said CFO Wendell Huang. He anticipates strong demand for smartphones and AI products in the third quarter.

Wall Street expects TSMC’s earnings to grow 26% annually over the next three years as the AI ​​boom fuels demand for faster semiconductors. That makes the current valuation of 32.4 times earnings look about right. These numbers give a PEG ratio of 1.2, which is a discount to the three-year average of 1.6. Investors should feel comfortable buying some shares today. TSCM stock has doubled the gains of the S&P 500 over the past three years and I believe it will continue to outperform over the next three.