Billionaire investor David Tepper invests 28% of his portfolio in 3 brilliant AI growth stocks

Billionaire David Tepper runs Appaloosa Management, a hedge fund that has regularly outperformed industry peers and the broader stock market since it was founded in 1993. Indeed, Appaloosa did S&P 500 (SNPINDEX: ^GSPC) 15 percentage points in the last three years. This suggests that Tepper and his fund’s investment choices are worth studying.

As of the September quarter, Tepper had invested 28.2% of his Appaloosa portfolio in just three artificial intelligence (AI) stocks: 8.8%; Nvidia (NVDA 4.17%)in 9.4% Amazon (AMZN 1.20%)and in 10% Microsoft (MSFT 1.22%). This level of asset allocation is a clear sign of high confidence.

Here’s what investors should know about these three brilliant AI stocks.

1. Nvidia

Nvidia has a strong presence in two semiconductor markets: graphics chips for gaming and professional design and data center accelerators (graphics processing units or GPUs) for complex workloads such as scientific computing and artificial intelligence (AI). Nvidia has over 95% market share in workstation graphics, and 80% to 95% market share in AI computing.

Nvidia has expanded its ability to monetize both markets with subscription software and cloud services. Omniverse is a virtual design and simulation platform for developing 3D and robotics applications as well as training autonomous vehicles. DGX Cloud is an AI application development platform that includes infrastructure, software and pre-trained machine learning models. Many investors mistakenly see Nvidia as nothing more than a chipmaker, but that description fails to account for its growing software and services business. CFRA analyst Angelo Zeno says Nvidia’s “software capabilities provide an incredible competitive moat.”

In recent years, Nvidia has expanded its data center portfolio with networking platforms and central processing units (CPUs), both purpose-built for AI workloads. Networking revenue has nearly tripled over the past year, and Nvidia is well-positioned to take on CPUs as it has a 95% market share in data center GPUs.

Going forward, the graphics processor market is predicted to grow by 28% annually until 2030, while the AI ​​market is predicted to grow by 37% annually during the same period. That gives Nvidia a good shot at over 25% annual sales by the end of the decade. Even in this context, its current valuation of 30.4 times sales looks expensive, but I think a patient investor willing to hold the stock for at least five years could buy a small position today.

2. Amazon

Amazon has a strong presence in three markets: e-commerce, digital advertising, and cloud computing. In particular, it operates the largest online marketplace in North America and Western Europe as measured by sales volume. Amazon is also the largest retail advertiser in the US and the third largest ad tech company in the world. And Amazon Web Services (AWS) is the largest provider of cloud infrastructure and platform services.

This last point is particularly relevant. “As a provider of infrastructure-as-a-service and other cloud services, AWS is uniquely positioned in the AI-as-a-service market,” quoted Argus analyst Jim Kelleher. In fact, the company is a recognized leader in cloud AI developer services, and its product pipeline is full of AI innovations.

Amazon Bedrock became generally available in September. The service provides pre-trained machine learning models and development tools that help businesses build generative AI applications. Most recently, the company announced Amazon Q, a creative AI business assistant that can generate content and layer insights into data sources and enterprise systems like Microsoft SharePoint. Sales forceAnd Service Now.

Going forward, retail e-commerce sales are predicted to grow 8 percent annually through 2030, while the ad tech and cloud computing markets are projected to grow 14 percent annually over the same period. That gives Amazon a good shot at double-digit annual sales growth by the end of the decade, making its current price of 2.9 times sales look pretty reasonable.

3. Microsoft

Microsoft has a strong presence in two markets: enterprise software and cloud computing. Because of its leadership in office productivity and enterprise resource planning (ERP) software, the company accounts for more than 16% of software-as-a-service spending, nearly double the market share of its closest competitor. Similarly, Microsoft Azure accounts for 23% of cloud infrastructure and platform services spending, second only to Amazon Web Services.

Microsoft is adding AI capabilities to its enterprise software to create new monetization opportunities. Microsoft 365 Copilot is a creative AI assistant that automates workflows in Office productivity applications like Word, PowerPoint, and Excel. Similarly, Copilot for Dynamics 365 automates workflows in ERP applications for sales, marketing, customer service, and supply chain management.

Microsoft is also investing heavily in AI in its cloud computing business. Azure is the exclusive cloud provider for OpenAI, and is the only cloud platform that provides access to pre-trained models from OpenAI, including the GPT models that power ChatGPT. Businesses can use these models to build custom generative AI applications. JP Morgan Chase “Microsoft’s investment in OpenAI, which began years ago, could potentially be the best investment ever,” analysts believe.

Going forward, enterprise software-as-a-service and cloud computing sales are forecast to grow 14 percent annually through 2030. That gives Microsoft a good shot at double-digit sales by the end of the decade. In this light, its current price of 13.3 times sales looks a bit expensive. I think patient investors can buy a short position today, but waiting for a cheaper price may be the most prudent course of action.