In this piece, we will take a look at the 10 best autonomous driving stocks to buy according to short sellers. Despite the fact that short seller indicator is one of the most useful indicators, it isn’t widely used by investors.
READ ALSO 13 Best Tech Stocks to Buy According to Short Sellers and 8 Best EV Stocks According to Short Seller Sentiment
2024 is the year of artificial intelligence. The revolutionary new technology that has disrupted the status quo on Wall Street has managed to shift investor attention away from economic turmoil to a specific set of firms that can benefit from the massive expected enterprise spending on accelerated computing and the associated industries needed to enable this shift. This has meant that despite the fact that interest rates have been at a 23 year high, the flagship S&P index is up by almost 44% since the close of 2022 while the tech heavy broader NASDAQ index has gained 63% during the same time period.
One technology that is part of artificial intelligence is autonomous driving. Autonomous driving, in its simplest form, is built on machine learning. Machine learning is a subset of artificial intelligence, so, autonomous driving is also artificial intelligence – a fact that is often left underappreciated by the broader media and analyst coverage. Autonomous driving uses neural nets to assimilate existing data and predict the behavior of pedestrians and other drivers. This ability offers the potential to create new industries, particularly where car owners provide their vehicles for autonomous ride sharing to earn money when they don’t need their vehicles.
According to McKinsey, consumer willingness to rely on shared autonomous vehicles for their trips over trips taken on existing private vehicles has only grown. As an example, its 2022 research showed that 56% of consumers surveyed were willing to use shared autonomous vehicles provided that they did not increase travel time and were at least 20% cheaper compared to their private counterparts. Additionally, 34% of those surveyed wanted level 4 (L4) autonomy in their next vehicle purchase. Autonomous driving is categorized across five levels, with level 1 being simple features such as cruise control and level 5 being a fully autonomous system that does not require any human attention or interaction.
McKinsey estimates that revenue from autonomous ride sharing fleet vehicles such as robotaxis and robo-shuttles could touch $400 billion by 2030, based on statistics such as the German passenger car fleet of 50 million vehicles being parked 95% of the time and offering 250 million seats to meet the entire population’s mobility needs.
Building on this, while we’ll get to the strides made by Elon Musk’s car company on this front later, other car companies have also jumped into the fray. For instance, the second best automotive stock to buy according to hedge funds has teamed up with Goldman Sachs’ eighth best hedge fund stock pick through its Cruise business to offer autonomous ride sharing services to customers next year. This will be one of the first robotaxi projects of its kind, and its announcement came months after the Autonomous Vehicle Industry Association (AVIA) had shared its first ever State of AV report. It shared that autonomous vehicles have driven nearly 70 million miles on American roads, with most of these being recent as the number of miles driven had marked a 59% growth since July 2023.
While big ticket car brands typically dominate the autonomous driving conversation, there are several private and small companies that are also ‘driving’ the mileage for autonomous vehicles so to speak. One such firm is Nuro, which aims to develop L4 logistics vehicles capable of making deliveries. It tests its products in a closed track in Las Vegas, and the firm has driven one million autonomous miles to date. Another firm is Gatik, which has partnered up with the second best hedge fund eCommerce stock pick and also the biggest brick and mortar retailer in the world. It offers autonomous transportation as a service (ATaaS) by operating box trucks that autonomously ship goods within different supply chain nodes such as fulfillment and distribution centers, stores, and warehouses.
Coming back to Elon Musk’s car company, autonomous driving and robotaxis are at the center of its valuation, at least as far as RBC Capital and Cathie Wood’s Ark Invest are concerned. According to RBC, Robotaxi’s revenue can sit at $120 billion in 2040, with the autonomous ride sharing business accounting for 52% of the firm’s valuation. Ark, as expected, is more optimistic. Its expected value for the car company’s share price is $2,600 in 2029, which will be driven by $8.2 trillion in enterprise value, $1.2 trillion in revenue, and $440 billion in operating income. As per the hedge fund’s research, 88%, 63%, and 86% of these values will be driven by Robotaxi.
Since autonomous vehicles require GPUs to train neural networks, and big tech firms’ insatiable PGU demand for non-autonomy related AI use cases has made these chips one of the hottest commodities in the world, a shortage in GPUs could impact the projected growth in autonomy. For instance, emails obtained by CNBC in June revealed that Musk had asked his GPU supplier to divert supplies intended for his car company to the social media firm X and AI company xAI. These shipments were worth roughly $500 million, and the latest earnings saw him share that he had no choice but to compete with the world’s largest GPU maker.
During the call, Musk outlined that since it was hard to procure the “state-of-the-art” GPUs, ” when we want them. And I think this therefore requires that we put a lot more effort on Dojo in order to have — in order to ensure that we’ve got the training capability that we need. So we are going to double down on Dojo, and we do see a path to being competitive with ” the GPU company.
With these details in mind, let’s take a look at the best autonomous driving stocks to buy according to short sellers.
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Our Methodology
To make our list of the best autonomous driving stocks, we ranked the holdings of Global X’s autonomy ETF that are focused on autonomous driving by the percentage of shares outstanding that were sold short and selected the stocks with the lowest percentage.
For these stocks, we also mentioned the number of hedge fund investors. 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 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10. Tesla, Inc. (NASDAQ:TSLA)
Short Interest as % of Shares Outstanding: 2.57%
Number of Hedge Fund Investors In Q2 2024: 85
Tesla, Inc. (NASDAQ:TSLA) marks an apt start to our list of the best autonomous driving stocks to buy according to short sellers. The firm’s fights with short sellers are well known, and autonomous driving is key to its future. Tesla, Inc. (NASDAQ:TSLA) is an industry leader in self driving, courtesy of its assisted driving platform called FSD. At the same time, Wall Street has priced in the Robotaxi – Tesla, Inc. (NASDAQ:TSLA)’s autonomous ride sharing platform – into its valuation as well. The firm benefits from its considerable road presence, with some estimates suggesting that Tesla, Inc. (NASDAQ:TSLA) has collected more than 1.3 billion miles of data from its cars that are on the roads. Data is the oil for machine learning, artificial intelligence, and autonomy, which provides Tesla, Inc. (NASDAQ:TSLA) with a considerable advantage on this front. The company also benefits from its robust manufacturing base that allowed it 1.85 million EVs in 2023, as well as its Dojo supercomputer that provides it with the needed computing punch to train neural nets for autonomous driving. At the same time, Tesla, Inc. (NASDAQ:TSLA) remains vulnerable to global copper supply chain disruptions as well as margin eroding competition in regions like China and tight GPU supply for training.
Polen Capital mentioned Tesla, Inc. (NASDAQ:TSLA) in its Q1 2024 investor letter. Here is what the firm had to say about autonomy in particular:
“Tesla’s narrative wasn’t just about being a great electric vehicle manufacturer. The way we see it, the narrative included Tesla becoming a fully autonomous fleet of electric vehicles (“Robotaxi”) soon, the charging platform for all E.V.s soon, an AI play, a global solar utility company soon, a future subscription business, a more. When we research Tesla, we see a differentiated auto business and the potential for many of these interesting “options” to be realized over a long enough period. However, the timing and true viability of many of these options are still unknown and often take much longer than many hope. To justify today’s valuation, even after the recent pullback, we see a company that needs to crack the mass market with a $25,000 or less model at acceptable margins. Yet, the company hasn’t articulated a clear path to getting there. Interest rates have risen, and competition in China has intensified, tempering demand for its existing, higher- priced cars. Valuation has become more difficult to justify at these levels. We feel the reality of these dynamics has finally started to settle into Tesla stock prices, and we look forward to seeing a more reasonable valuation that reflects the existing product portfolio and any future offerings that demonstrate a very clear path to near-term commercialization.”
9. Baidu, Inc. (NASDAQ:BIDU)
Short Interest as % of Shares Outstanding: 2.18%
Number of Hedge Fund Investors In Q2 2024: 42
Baidu, Inc. (NASDAQ:BIDU) is a Chinese technology giant that is one of the hottest names in the autonomy industry. The firm operates an autonomous ride hailing platform called Apollo Go Robotaxi which is currently available to travelers in Wuhan, China. Apollo Go is one of the few autonomous ride sharing platforms in the world that is operational, which enables Baidu, Inc. (NASDAQ:BIDU) to gain real world experience and understand customer preferences. As of July, there were 300 such ‘taxis’ operating in Wuhan, with a few notable incidents such as a car violating a red light and crashing into a pedestrian. Baidu, Inc. (NASDAQ:BIDU)’s software business model has also allowed the firm to become a major player in the Chinese machine learning industry through platforms such as PaddlePaddle. This should prove to be beneficial to its autonomy plans too, but at the same time, tensions between the US and China mean that Baidu, Inc. (NASDAQ:BIDU) can struggle to acquire power chips for its software. Investor pessimism is also present in Baidu, Inc. (NASDAQ:BIDU)’s shares, which trade at a forward P/E of 7.69 despite its high growth businesses.
Ariel Investments mentioned Baidu, Inc. (NASDAQ:BIDU) in its Q1 2024 investor letter. Here is what the fund said:
“Alternatively, several positions weighed on performance. China’s internet search and online community leader, Baidu, Inc. traded lower alongside Chinese equities as intensifying problems in China weighed on investor sentiment during the period. The company continues to invest heavily in Artificial Intelligence (AI) and recently launched its generative AI, Ernie Bot, aimed at rivaling Open AI’s ChatGPT. While monetization of the new technology is largely dependent on regulatory review, we think Baidu should continue to experience margin improvement with the ongoing implementation of efficiency and profitability initiatives. While some investors remain on the sidelines due to uncertainty surrounding China’s economic growth, government regulations, and the political rhetoric towards Taiwan, we remain enthusiastic about Baidu’s longer-term opportunity for revenue growth and margin expansion across internet search, cloud, autonomous driving, artificial intelligence and online video.”
8. Mobileye NV (NYSE:MBLY)
Short Interest as % of Shares Outstanding: 1.65%
Number of Hedge Fund Investors In Q2 2024: 28
Mobileye NV (NYSE:MBLY) is a pure play autonomous driving company. This offers it a considerable advantage in the industry, as the firm is able to offer a variety of autonomous driving products such as real time road detection, driver navigation assistance, and products like its SuperVision platform which enables assisted driving at speeds faster than 100 kilometers. Mobileye NV (NYSE:MBLY) is also trying to compete in the lower costs ADAS market these days through its EyeQ6 platform to help capture customers that want lower prices. This is a recent trend in the autonomy industry and one that has threatened Mobileye NV (NYSE:MBLY)’s leading presence. At the same time, as its previous products such as warning systems have shown, the firm tends to lose market share when car companies self develop features similar to those that it offers and pioneers. With the current landscape of the autonomy industry seeing big ticket players such as Tesla and GM focusing on in house self driving capabilities, Mobileye NV (NYSE:MBLY) could face further headwinds on this front. Finally, 31% of the firm’s 2023 revenue came from China, which is a double edge sword. While it allows Mobileye NV (NYSE:MBLY) to capture one of the fastest growing and largest autonomy markets in the world, it could face a substantial blow if the US expands chip sanctions against China or China acts unfavorably against Western companies – especially as Mobileye NV (NYSE:MBLY) is an Intel subsidiary.
Mobileye NV (NYSE:MBLY)’s management is working with OEMs for its ADAS system partnerships. Here’s what they shared during the Q2 2024 earnings call:
“We are currently already responding to four RFQs representing over 19 million future units supported with a single EyeQ6 High with pricing that is approximately four times our current ASP and with similar gross margins to the Company average.
To put this value into context, the life revenue value of these RFQs from just four OEMs is already about double the value of all the combined ADAS RFQs we’re currently pursuing with more than 70 OEMs. On SuperVision and Chauffeur specifically, we have made substantial progress across many predevelopment engagements and we believe we are on track for major design wins by year-end 2024, with a strong pipeline of more to come in 2025. We currently have advanced product wins or are in advanced discussions with 14 OEMs, representing approximately 52% of industry production. Within that number, two of the OEMs are currently only pursuing surround ADAS category, I mentioned above, and two are pursuing both SuperVision and Chauffeur and surround ADAS.
We’re also seeing accelerated interest in our drive platform, which serves the mobility as a service market. The Volkswagen commercial vehicle program is progressing nicely. Zeekr is looking to develop with us in this area. And there is an additional major OEM from Japan, where we continue to progress through pre-award testing activities. We believe that we are in the inflection point of becoming the clear market leader in these initiatives, both technologically and commercially.”
7. Westinghouse Air Brake Technologies Corporation (NYSE:WAB)
Short Interest as % of Shares Outstanding: 1.40%
Number of Hedge Fund Investors In Q2 2024: 60
Westinghouse Air Brake Technologies Corporation (NYSE:WAB) is one of the oldest railroad companies in the world. It has a diversified product portfolio which includes locomotives, braking systems, and refurbishment. While others are focusing on autonomous cars, Westinghouse Air Brake Technologies Corporation (NYSE:WAB) is one of the few firms of its kind that is focusing on autonomous trains. The firm completed a massive $11 billion merger with GE’s transport business in 2019, as both firms aimed to complement their strengths and eradicate weaknesses in developing autonomous trains. Now, Westinghouse Air Brake Technologies Corporation (NYSE:WAB) offers train operators the ability to remotely control trains during loading and unloading and during yard movements such as set outs and pick ups. While these products push any potential exposure to the firm from autonomous trains far out in the future, they also position Westinghouse Air Brake Technologies Corporation (NYSE:WAB) as one of the likeliest firms to develop autonomy in one of the oldest logistics systems in the world.
Westinghouse Air Brake Technologies Corporation (NYSE:WAB) is also making big moves in the clean train industry as management shared during the Q2 2024 earnings call:
“In North America, we secured a multiyear order for greater than $600 million. This is one of our largest orders for new Tier 4 locomotives ever. It demonstrates customer demand for a best-in-class solution to improve productivity, reduce fuel usage, improve reliability and to significantly reduce emissions. I would also like to share with you a key international services order, a 10-year agreement in Brazil for which Wabtec will manage the servicing of Vale’s locomotives fleet to increase availability, reliability and safety. In Pakistan, we recently won a strategic order for 15 modernizations for Pakistan Railway. This is a great example of the opportunities that we have to modernize locomotives in our international markets.”
6. NXP Semiconductors N.V. (NASDAQ:NXPI)
Short Interest as % of Shares Outstanding: 1.34%
Number of Hedge Fund Investors In Q2 2024: 52
NXP Semiconductors N.V. (NASDAQ:NXPI) operates on the hardware side of the autonomy industry. It makes and sells radar processing systems, radar transceivers, safety processors, and system on chip (SoC) packages that are used in ADAS platforms. NXP Semiconductors N.V. (NASDAQ:NXPI) is one of the biggest automotive chip suppliers in the world. Since the semiconductor industry is built on long term partnerships as semiconductor fabrication firms and OEMs work together for chip design, this offers it considerable leverage in capturing chip and related product orders stemming from the growth in autonomous vehicles. Additionally, the semiconductor industry is also capital intensive, which reduces the risk of new entrants threatening to take NXP Semiconductors N.V. (NASDAQ:NXPI)’s business away. However, high exposure to the automotive industry leaves the firm vulnerable to cyclical downtrends and any inventory buildups, despite the fact that NXP Semiconductors N.V. (NASDAQ:NXPI) also operates in the IOT and communications industries.
NXP Semiconductors N.V. (NASDAQ:NXPI) is currently busy managing its inventory as management shared during the Q2 2024 earnings call:
“With that, our quarter 3 guidance assumes approximately 1.8 months of distribution channel inventory. However, we will not grow channel inventory back to anywhere near our long-term target of 2.5 months within this calendar year. As a result, we will continue to stage inventory in a very controlled and targeted manner in the channel. Taken together, the second half will grow over the first half with the potential outcome for 2024 to be a modest annual revenue decline in the low single digit range. This is toward the low end of our earlier expectations because of the more persistent and deep inventory digestion at our auto Tier 1 customers and due to the continued weakness in our core industrial markets in Europe and the Americas. Before turning the call over to Bill, I would like to highlight what I believe is a truly strategic long-term investment for our hybrid manufacturing strategy.”
5. NVIDIA Corporation (NASDAQ:NVDA)
Short Interest as % of Shares Outstanding: 1.20%
Number of Hedge Fund Investors In Q2 2024: 179
NVIDIA Corporation (NASDAQ:NVDA) is the global leader in designing artificial intelligence chips. Its GPUs are used to train neural nets and other software that forms the bedrock of autonomous driving. Additionally, NVIDIA Corporation (NASDAQ:NVDA) also serves the needs of the auto industry through its DRIVE AGX platform that allows autonomous vehicles to process data from cameras, radars, and other sensors. Its brand name which stems from high performance products has allowed NVIDIA Corporation (NASDAQ:NVDA) to establish a robust brand name that has enabled it to land deals with big ticket car companies like BMW and Hyundai. The firm’s criticality to the AI supply means that it stands to benefit from the growth in neural network training as well as from car companies that might be looking to develop in house autonomy solutions but skip the costs of developing in vehicle computing hardware. However, NVIDIA Corporation (NASDAQ:NVDA) is often vulnerable to high cyclical variation and inventory glut due to hot demand for its products and could face headwinds in the future if trade tensions between the US and China intensify.
Baron Funds mentioned NVIDIA Corporation (NASDAQ:NVDA) in its Q2 2024 investor letter. Here is what the fund said:
“More recently, however, we’ve entered the period of doubts and questioning, some of which is real and normal in the first stages of a new paradigm, and some of which is prompted by short sellers. Given the explosive returns of NVIDIA and other AI leaders, AI bears and fear mongers have been comparing the current AI market winners with the internet bubble of the late 1990s/early 2000s, and NVIDIA’s stock move today with Cisco’s back then. First, while many stocks were trading at nosebleed valuations and on made up metrics (such as price per eyeballs) before the bursting of the internet bubble, as we’ve said many times, the internet proved to transform our world and create the digital age we are now living in. Second, while NVIDIA’s stock price inflection has been nothing short of unprecedented for a company of its size, it was fueled almost entirely by explosive growth in revenues, earnings, and cash flows– not multiple expansion. Over the last 12 months, NVIDIA’s stock has eectively tripled, but its forward P/E multiple has remained essentially flat, because NVIDIA blew away Wall Street expectations despite being covered by over 60 sell-side analysts, who have increased their forward projections every single quarter. In my career, the only comparative analogue is when Apple first introduced the iPhone and stunned Wall Street with its growth. In contrast, most of Cisco’s move in the late 1990s was due to multiple expansion. At its peak, Cisco traded at a P/E ratio over 130 times, more than quadruple its five-year average of 37 times. At the end of the second quarter, NVIDIA traded at a P/E ratio of 40 times, equal to its five-year average, and at a P/E to growth (or PEG) ratio for 2025 of 0.8 times, as consensus expectations are for NVIDIA to grow earnings per share 40% next year.
Moreover, investor concerns have arisen about the financial impact AI is having and whether surging capital expenditures (capex) across the technology landscape, particularly the large cloud players (Microso, Google, Amazon, and Meta), known as the hyperscalers, will be justified and earn reasonable returns on invested capital (ROIC). First, the adoption and penetration of new technology typically traces a classic S-curve–or more precisely, in our view, a series of S-curves or phases. For at least the past year and a half, we’ve been in what might be called the AI infrastructure- build phase – building the AI factories, as NVIDIA CEO Jensen Huang has articulated it, and this phase has been dominated by the infrastructure- layer players – the accelerated computing chips suppliers like NVIDIA and Broadcom, as well as data center, cloud infrastructure and energy companies. The hyperscalers, other enterprises, and sovereign entities investing ahead understand that if you want to be in the AI game, you must invest now – build the infrastructure, build the factories – or else you’ll find yourselves disrupted on the sidelines or playing catch up in the biggest game, the most important race in a technology generation. Only those who invest today even have the chance to be the winners of the future.”
4. Honeywell International Inc. (NASDAQ:HON)
Short Interest as % of Shares Outstanding: 0.85%
Number of Hedge Fund Investors In Q2 2024: 50
Honeywell International Inc. (NASDAQ:HON) is one of the biggest industrial conglomerates in the world. It caters to the needs of the aerospace, construction, pharmaceutical, information technology, and other industries. On the autonomy front, Honeywell International Inc. (NASDAQ:HON) operates in a specific part of the autonomous hardware industry that enables self driving cars to determine their position, orientation, and velocity even when not connected to the Internet. These products are called inertial measurement units (IMUs), and these are already being used by Minnesota based self driving research company VSI Labs. Honeywell International Inc. (NASDAQ:HON) is also aiming to close its $216 million acquisition of an Italian company to further bolster its IMU portfolio. On a broader level, the firm’s different businesses offer it the benefits of diversification. The aerospace sector, which is typically funded through government projects, is resilient to cyclical downturns, which helps Honeywell International Inc. (NASDAQ:HON) to hedge against other sectors such as construction and electronics. The same benefits apply to pharmaceuticals, However, $5.6 billion of Honeywell International Inc. (NASDAQ:HON)’s roughly $9.4 billion in revenue during Q2 2024 came from cyclical businesses, which creates vulnerability for the stock.
This vulnerability was also on the mind of Mar Vista Investment Partners’ Q1 2024 commentary for Honeywell International Inc. (NASDAQ:HON):
“After nearly 14 years of owning shares in Honeywell, we decided to sell our investment during the quarter. This decision was based on a combination of issues that threatened our investment thesis for the company. The main challenges were related to organic growth and capital deployment. Specifically, we have concerns about Honeywell’s future organic growth and its indecisive approach to capital deployment. Even with a strong balance sheet, cash surplus, and low leverage, its capital deployment process lacks direction. Additionally, Honeywell is heavily invested in cyclical and short-cycle businesses which can be volatile. For these reasons, we sold our investment in Honeywell.”
3. Stellantis N.V. (NYSE:STLA)
Short Interest as % of Shares Outstanding: 0.79%
Number of Hedge Fund Investors In Q2 2024: 31
Stellantis N.V. (NYSE:STLA) is one of the biggest car companies in the world and operates through well known brands such as Alfa Romeo, Fiat, Jeep, Maserati, and others. This provides it with one of the biggest moats to implement autonomous driving technologies, and on all ends of the spectrum from luxury cars to affordable ones. Stellantis N.V. (NYSE:STLA) has also been operating in the autonomy industry for three years after it announced its AutoDrive platform in 2021. It is also making large strides in the US, and plans to become the first car company in America to offer Level 3 autonomous driving in 2025. L3 systems enable a hands and eyes free driving experience, and if its rollout is successful (depending on state level regulations), then Stellantis N.V. (NYSE:STLA) will have gained a sizeable advantage over even Tesla. Yet, these systems also shift accident liability on the car company, and its pure play nature as a car company leaves it vulnerable to cyclical downturns. This also makes it unsurprising that Stellantis N.V. (NYSE:STLA)’s shares are down 31% year to date, and any recovery depends on the global economic environment as indicated by economic growth and lower interest rates.
Ariel Investments mentioned Stellantis N.V. (NYSE:STLA) in its Q2 2024 investor letter. Here is what the firm said:
“Finally, multinational automotive manufacturing company, Stellantis N.V. (STLA), fell in the quarter as higher interest rates in the U.S. and tapering demand for high-volume combustion engine models resulted in elevated U.S. inventory levels. Nonetheless, pricing outperformed expectations and management reiterated full-year guidance of double-digit adjusted operating profit margin and positive free cash flow. Although we expect discounting to increase as U.S. inventory ages, we maintain a constructive view on the company. We believe STLA’s strong global footprint and unwavering dedication to leading the industry in profitability, operational excellence, and strategic foresight will continue to enhance long-term shareholder value.”
2. Microsoft Corporation (NASDAQ:MSFT)
Short Interest as % of Shares Outstanding: 0.74%
Number of Hedge Fund Investors In Q2 2024: 279
Microsoft Corporation (NASDAQ:MSFT) is the global leader in cloud computing and artificial intelligence technologies. Its enterprise computing business accounted for $28.4 billion of its $64 billion in FY24 revenue, underscoring the importance of this business to Microsoft Corporation (NASDAQ:MSFT)’s hypothesis. Since it’s one of the biggest enterprise and cloud computing companies in the world, Microsoft Corporation (NASDAQ:MSFT) also benefits from the ability to enable car companies to develop their autonomous driving software. Currently, the firm directly serves the needs of the autonomy industry through Microsoft AVOps which enables customers to develop automated driving solutions through the Azure platform. Microsoft Corporation (NASDAQ:MSFT)’s heft, as evidenced by its $ in cash and equivalents also helps it invest in other companies. On this front, it, along with NVIDIA and Softbank invested $1 billion in the British self driving firm Wayve. Microsoft Corporation (NASDAQ:MSFT)’s reliance on the cloud for its earnings, and its aggressive investments in AI (CapEx was $55.7 billion in FY24) also means that if it fails to generate AI revenue, then the stock could suffer as investors punish it for inefficient capital allocation.
Fred Alger Management mentioned Microsoft Corporation (NASDAQ:MSFT) in its Q2 2024 investor letter. Here is what the fund said:
“Microsoft is a beneficiary of corporate America’s transformative digitization. The company operates through three segments: Productivity and Business Processes (Office, LinkedIn, and Dynamics), Intelligent Cloud (Server Products and Cloud Services, Azure, and Enterprise Services), and More Personal Computing (Windows, Devices, Gaming, and Search). During the quarter, shares contributed to performance after the company reported strong fiscal third quarter results, underscoring its leadership position in the cloud and highlighted its role as a primary facilitator and beneficiary of AI adoption. Company revenue growth, operating margin, and earnings growth surpassed consensus expectations. The utility scale Azure cloud business grew 31% in constant currency of which 7% was AI related versus 3% two quarters ago. Further, management noted most of the AI revenue continues to stem from inference rather than training indicating high quality AI applications by Microsoft’s clients. Management also indicated that the significant cost-cutting programs in corporate America are done, suggesting that the cost optimization headwinds previously impacting Azure’s growth are over. Separately, management provided color on their new AI-productivity tool, Copilot, noting that approximately 60% of Fortune 500 companies are already using Copilot, and that the quarter witnessed a 50% increase in Copilot assistance integration within Teams. We continue to believe that Microsoft has the potential to hold a leading position in AI, given its innovative approach and demonstrated high unit volume growth opportunity.”
1. Alphabet Inc. (NASDAQ:GOOGL)
Short Interest as % of Shares Outstanding: 0.56%
Number of Hedge Fund Investors In Q2 2024: 216
Alphabet Inc. (NASDAQ:GOOGL) is a mega cap technology firm that is one of the industry leaders in artificial intelligence. Like other big tech companies, Alphabet Inc. (NASDAQ:GOOGL) also benefits from having access to its own foundational model. Called Gemini, it enables the firm to compete with Microsoft backed OpenAI, Facebook parent Meta, and Amazon’s Anthropic at the leading edge of the foundation AI industry. Alphabet Inc. (NASDAQ:GOOGL) also has a direct presence in the autonomous driving industry through its Waymo business division. More than 700 Waymo cars are present in San Francisco alone, and they have also come under criticism for fires, crashes, and traffic violations. Alphabet Inc. (NASDAQ:GOOGL) also offers robotaxi services, and Waymo shared in August that it offers 100,000 robotaxi rides in San Francisco, Los Angeles, and Phoenix, Arizona. Like Baidu in China, this provides Alphabet Inc. (NASDAQ:GOOGL) a sizeable lead over rivals and allows it to attune itself to market expectations. However, the bulk of the firm’s revenue is from the Google Search business, and any disruption from AI or regulatory or anti trust action from the government could create headwinds for Alphabet Inc. (NASDAQ:GOOGL).
Patient Capital Management mentioned Alphabet Inc. (NASDAQ:GOOGL) in its Q2 2024 investor letter. Here is what the fund said:
“Alphabet Inc. (GOOGL) was a top contributor in the second quarter, finally catching up to its peers in the Magnificent 7. The company gained 20.8% in the period following strong first quarter earnings, a new $70B repurchase program (3% of shares outstanding) and the initiation of a cash dividend ($0.20 per share; 0.42% yield). We continue to believe the market underappreciates Google’s exposure to AI with its Gemini model being integrated into search results, YouTube advertising and its cloud offering. We continue to think that the cloud players will be the AI winners in the long-term, with Google being well positioned to take advantage. While the company trades at 24x 2024 earnings, if you remove the money-losing and under-earning businesses, you realize that you are paying below a market multiple for the core Google business. We do not believe there are many other AI winners trading at such an attractive multiple.”
GOOGL tops our list of autonomous driving stocks that short sellers aren’t buying. But our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GOOGL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
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