Billionaire David Tepper Invests 14% of His Portfolio in AI Stocks

The field of artificial intelligence (AI) is experiencing remarkable growth, attracting numerous companies eager to establish their dominance. The potential rewards for successful players in this domain are immense, benefiting both the companies and their investors. However, identifying which companies will thrive can be daunting. Looking at the investment strategies of notable money managers can provide valuable insight, especially when considering the choices made by billionaire David Tepper, the founder of Appaloosa Management.

As of the third quarter, Tepper's hedge fund has invested approximately 14% of its portfolio in two leading AI-related stocks: Amazon (AMZN) and Meta Platforms (META). Let's delve deeper into why these companies are considered solid investments.

1. Amazon

Amazon operates across multiple industries, including e-commerce, streaming, advertising, healthcare, and cloud computing. A key player in the AI space, Amazon provides a variety of AI services through its cloud division, Amazon Web Services (AWS). This includes advanced technologies like its large language model, Bedrock, and an AI assistant known as Amazon Q. AWS has consistently been Amazon's most lucrative segment.

The impact of AI is already evident. In the third quarter, Amazon reported a year-over-year sales increase of 11%, reaching $158.9 billion. Notably, AWS revenue jumped 19% year over year to $27.5 billion. Although AWS contributes only about 17% of Amazon's total revenue, it generates a significant 60% of the company's operating income. Amazon's management noted substantial growth in AWS alongside triple-digit year-over-year revenue increases in its AI division over the past four quarters.

Despite these successes, there remains considerable potential for future expansion. We are still witnessing the early stages of the AI revolution, which could serve as a long-term growth driver for Amazon, similar to how AWS evolved into a powerhouse for the company since its launch in 2006. Moreover, Amazon’s diverse business model mitigates concerns about potential slowdowns that could impact dedicated AI companies.

Another crucial aspect of Amazon's success is its competitive advantages. AWS benefits from customer switching costs, while Amazon’s e-commerce operations leverage strong network effects. Although competition is a constant, a firm with Amazon's robust competitive position is likely to continue thriving.

With its thriving AWS division, numerous growth opportunities in other areas, and a solid competitive moat, Amazon emerges as a prime candidate for AI investment.

2. Meta Platforms

Meta Platforms has established itself as a dominant player in the advertising space. AI is increasingly influencing its operations, as the company employs AI-driven algorithms to enhance traffic and user engagement on its platforms.

Features like Reels, the platform's short-form video content, have surged in popularity, enhancing Meta's competitiveness against rivals like TikTok. Additionally, the company has introduced generative AI tools that assist businesses in creating ads for its platforms, demonstrating successful outcomes.

Meta is also developing AI technologies, including its large language model known as Llama and its MetaAI virtual assistant, which boasts over 500 million active users. The integration of AI significantly contributed to Meta's impressive financial performance this year. In the third quarter, Meta saw a 19% year-over-year revenue increase, reaching $40.6 billion, with net income climbing to $15.7 billion—a 35% rise compared to the previous year.

Looking ahead, Meta plans to increase its investment in AI-related infrastructure, signaling its commitment to this technological frontier. Although initial responses from the market were mixed, this strategic move has the potential to yield significant rewards. Meta's user base, which reached 3.29 billion daily active users by the end of the third quarter (a 5% annual increase), demonstrates a vast ecosystem ripe for monetization.

With multiple revenue-generating avenues in development, including paid messaging features on WhatsApp, Meta Platforms possesses ample growth potential, with AI at the forefront of its strategy.

In conclusion, both Amazon and Meta Platforms represent compelling avenues for investing in the thriving AI sector. Their strong operational foundations and innovative approaches position them favorably to benefit from ongoing advancements in artificial intelligence.

AI, Investing, Stocks