Last month, a Chinese artificial intelligence startup called DeepSeek sparked a broad market sell-off in the tech world. Investors became increasingly skeptical about tech giants’ massive spending needs, questioning if AI development is possible with lower costs and less advanced hardware.
Distillation, in particular, is the underlying issue in Silicon Valley that eventually led to the entire show. The distillation process allows new AI models to quickly and cheaply learn from existing ones, having the potential to reshape the AI industry.
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That’s right, distillation can allow even a small team with virtually no resources to make an advanced AI model. While DeepSeek isn’t the one who invented this process, it did open up all its possibilities to the AI world.
“This distillation technique is just so extremely powerful and so extremely cheap, and it’s just available to anyone. We’re going to see so much competition for LLMs. That’s what’s going to happen in this new era we’re entering.”
-Databricks CEO Ali Ghodsi.
As reported by CNBC, the distillation process allowed researchers at Berkeley to recreate OpenAI’s reasoning model for $450 in 19 hours last month. In another instance, researchers at Stanford and the University of Washington created their reasoning model in just 26 minutes, and that too, by using less than $50 in compute credits. The startup Hugging Face has also managed to create OpenAI’s newest and flashiest feature, Deep Research, as part of a 24-hour coding challenge.
“Open source always wins in the tech industry. You cannot beat the momentum that a successful open-source project is able to actually generate.”
-Arvind Jain, CEO of Glean, a company that makes an AI-powered search engine for enterprises.
Even OpenAI thinks that it has been on the wrong side of history.
“Personally I think we have been on the wrong side of history here and need to figure out a different open-source strategy”.
-OpenAI CEO Sam Altman
For this article, we selected AI stocks by going through news articles, stock analysis, and press releases. These stocks are also popular among hedge funds. The hedge fund data is as of Q4 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
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10. International Business Machines Corporation (NYSE:IBM)
Number of Hedge Fund Holders: 60
International Business Machines Corporation (NYSE:IBM) is a multinational technology company and a pioneer in artificial intelligence, offering AI consulting services and a suite of AI software products. On February 25, the company announced its intent to acquire DataStax, an AI and data solution provider. The acquisition of DataStax will allow IBM to use its technology to enhance IBM’s own Watsonx portfolio of products, helping accelerate the use of AI.
The acquisition will also allow IBM to build on its commitment to open-source AI considering that DataStax is the creator of AstraDB and DataStax Enterprise, NoSQL and vector database capabilities powered by Apache Cassandra®; and Langflow, the open-source tool and community for low-code AI application development. IBM is helping clients scale generative AI and transform businesses using enterprise data, and DataStax’s tools is going to further enhance these efforts.
“Businesses cannot realize the full potential of generative AI without the right infrastructure – open-source tools and technologies that empower developers, harness unstructured data, and provide a strong foundation for AI applications. DataStax possesses deep competency in this area and shares IBM’s relentless commitment to simplifying and scaling generative AI for the enterprise.”
-Dinesh Nirmal, Senior Vice President, IBM Software.
9. Cisco Systems, Inc. (NASDAQ:CSCO)
Number of Hedge Fund Holders: 60
Cisco Systems, Inc. (NASDAQ:CSCO) is an American technology company that provides information technology and networking services. On February 25, the company announced that it is expanding its partnership with NVIDIA to provide AI technology solutions to enterprises. Even though artificial intelligence is critical to growth, enterprises are still figuring out how to navigate the technical complexity and security demands of AI-ready data centers. Through this expanded partnership between Cisco and Nvidia, the two companies will develop a cross-portfolio unified architecture that will simplify building AI-ready data center networks.
NVIDIA will empower Cisco Silicon One coupled with NVIDIA SuperNICs to become part of the NVIDIA Spectrum-X Ethernet networking platform, with Cisco being the only partner silicon included in NVIDIA Spectrum-X. As such, the NVIDIA Spectrum-X Ethernet networking platform based on Cisco and NVIDIA silicon will be forming the base for many enterprise AI workloads. Essentially, customers will be able to optimize their AI infrastructure investments with a common architecture by leveraging their existing management tools and processes.
“Enterprises are under immense pressure to deploy AI quickly and effectively, and many leaders struggle to justify the investment while balancing the risks. Together, Cisco and NVIDIA are partnering to remove barriers for customers and ensure they can optimize their infrastructure investments to unlock the power of AI.”
-Chuck Robbins, Chair and CEO, Cisco.
8. Quanta Services, Inc. (NYSE:PWR)
Number of Hedge Fund Holders: 67
Quanta Services, Inc. (NYSE:PWR) is an infrastructure company that provides solutions for the electric and gas utility, renewable energy, communications, pipeline, and energy industries.
On February 25, BMO upgraded Quanta Services to “Outperform” from Market Perform with a revised price target of $316, down from $338. The firm stated that investors should buy the dip in the infrastructure company.
“Recent pullback on power and related infrastructure offers attractive opportunity to lean into PWR.”
Besides BMO, Roth MKM is also bullish on Quanta, having initiated coverage of the stock with a “Buy” rating and a $350 price target. The analysts told investors in a research note that Quanta is an engineering, procurement, and construction company offering infrastructure solutions, and it is best positioned for data centers and artificial intelligence.
7. Constellation Energy Corporation (NASDAQ:CEG)
Number of Hedge Fund Holders: 85
Constellation Energy Corporation (NASDAQ:CEG) is an energy provider specializing in clean, carbon-free energy solutions. On February 24, DBS analyst Elizabelle Pang maintained a “Hold” rating on the stock and set a price target of $300.00. Even though Constellation holds considerable potential, risks associated with the company’s current market position have led to the hold rating. Discussing its potential, the firm highlighted how Constellation’s recent announcement to acquire Calpine Corporation, driven by the proliferation of AI data centers and the electrification of transportation and buildings, has been a strategic move for the company.
The firm stated that the move could meaningfully enhance its scale and earnings from 2026 onwards, owing to an attractive acquisition multiple. However, one concern that remains is the exposure to natural gas prices which could impact future profitability. The firm said that despite these promising prospects, the current valuation of CEG’s stock is high, trading at a forward PE of 30x. This is significantly above its historical average. There are also potential risks such as extreme weather conditions affecting power prices, uncertainties in policy, and inflationary pressures on fuel expenses, that could be challenging for Constellation.
6. Alibaba Group Holding Limited (NYSE:BABA)
Number of Hedge Fund Holders: 107
Alibaba Group Holding Limited (NYSE:BABA) is an internet giant that offers e-commerce services in China and internationally. On February 25, the company unveiled a preview of its next reasoning model QwQ-Max. The model has the potential to rival OpenAI’s o1 and DeepSeek’s r1 models, further intensifying the global artificial intelligence race.
According to the Qwen team, QwQ-Max-Preview is built on the most advanced model of the series, the Qwen 2.5-Max, boasting stronger and more versatile reasoning and problem-solving skills. The preview model is available for free on the Qwen chatbot website. Alibaba’s move comes amid the company’s recent pledge to invest US$53 billion in cloud and AI infrastructure in the next three years.
5. Tesla, Inc. (NASDAQ:TSLA)
Number of Hedge Fund Holders: 126
Tesla, Inc. (NASDAQ:TSLA) is an automotive and clean energy company that leverages advanced artificial intelligence in its autonomous driving technology and robotics initiatives. One of the biggest analyst calls on Wednesday, February 26, was for Tesla Inc. Morgan Stanley reiterated the stock as “Overweight”, stating that it is sticking with the stock as the leader in autonomous driving.
“When will TSLA supply FSD/autonomy to a traditional OEM? We’re not holding our breath here. While we see scope for some announcements on select platforms, our latest read following 4Q results is that Tesla has plenty of data, is focused on its own path and want to avoid distraction.”
Analysts on Wall Street currently have a consensus “Buy” rating on the stock. The average price target of $412 implies a 38% upside, however, the Street-high target of $1,000 implies an upside of 235%.
4. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders: 166
Apple Inc. (NASDAQ:AAPL) is a technology company. One of the biggest analyst calls on Wednesday, February 26, was for Apple Inc. Analyst Mike Ng of Goldman Sachs maintained a “Buy” rating on the stock and retained the price target of $294.00. According to the firm, the strategic launch of the iPhone 16e, coupled with the significant US investments Apple has promised to build Apple Intelligence infrastructure, data centers, and more, has led to an optimistic rating for the stock.
In particular, the firm highlighted how the iPhone 16e, an entry-level phone boasting the A18 chip, Apple Intelligence, extraordinary battery life, and a 48MP 2-in-1 camera system, comes with a price increase and internalized modem which are anticipated to boost profit margins. The lack of lead time on the phone further reflects the strong supply chain management and availability, a positive sign for its sales.
“We’re encouraged by the role that iPhone 16e plays as an entry-level phone in the iPhone portfolio and believe that the price increase (relative to iPhone SE3) and internalized modem should be supportive of margins. There are no lead times on iPhone 16e.”
3. NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Holders: 223
NVIDIA Corporation (NASDAQ:NVDA) specializes in AI-driven solutions, offering platforms for data centers, self-driving cars, robotics, and cloud services. On February 25, Reuters reported that Chinese companies are mounting up orders for Nvidia’s H20 artificial intelligence chip amid the burgeoning demand for DeepSeek’s AI models. This surge in orders underscores Nvidia’s dominance in the chip market and also alleviates concerns that the emergence of low-cost models may cause a slide in AI chip demand.
Tencent, Alibaba, and ByteDance have considerably increased the order of these chips for their internal needs as well as the provision of cloud computing services through which other firms can access and use AI tools. Companies in sectors such as healthcare and education are also purchasing these chips, the report noted. At the same time, U.S. President Donald Trump’s administration is considering imposing restrictions on the sale of these H20 chips to China. According to Nvidia, its products won “on merit in a competitive field”.
2. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Investors: 262
Meta Platforms, Inc. (NASDAQ:META) is a global technology company. On February 25, Morgan Stanley reiterated Amazon, Microsoft, Alphabet and Meta as “Overweight”, asserting that several major internet and tech companies are well positioned for GenAI returns.
“Visibility on demand drivers across Software and Internet is firming as we see $153B in GenAI revenue in 2025, boding well for MSFT, AMZN, GOOG, and META.”
Analysts on Wall Street currently have a consensus “Buy” rating on Meta Platforms, Inc. The average price target of $775 implies a 14% upside, however, the Street-high target of $900 implies an upside of 32%.
1. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders: 317
Microsoft Corporation (NASDAQ:MSFT) provides AI-powered cloud, productivity, and business solutions, focusing on efficiency, security, and AI advancements. On February 25, Reuters reported that Microsoft has made an undisclosed equity investment in Veeam Software, a privately held information technology company that helps customers recover data after cybersecurity incidents, ransomware attacks, or accidental data loss.
The two will be building artificial intelligence solutions as part of an extended partnership, helping customers protect, recover, and unlock more value from their data. According to Veeam, it will be focusing on research and development investments and design collaboration with Microsoft’s support, while also integrating Microsoft’s AI services into its products.
“AI is transforming every aspect of business. By integrating Microsoft AI with Veeam’s market-leading data resilience solutions, we’re helping customers not only protect their critical data but also unlock new insights and efficiencies across Microsoft 365 and Azure.”
-Jason Graefe, Corporate Vice President, ISV’s & Digital Natives, Microsoft.
While we acknowledge the potential of MSFT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than MSFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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