In this piece, we will take a look at the ten best stocks to buy right now according to Cliff Asness.
The investment approach of Cliff Asness, through his multi billion dollar hedge fund AQR Capital Management, is quite unique. While some investors such as Warren Buffett and Seth Klarman focus on value, and others like Ken Fisher focus on growth, Asness’ fund tries to quantitatively define what quality is.
While it sounds like a tall order, the hedge fund investor whose latest net worth is estimated to be $2 billion, has written quite a bit on the determinants of a quality stock. One such work came in the form of a research paper published in 2013. In it, Asness and his co authors shared three primary drivers of a quality stock. These are a stock’s profitability, growth, and safety. Within these three factors, profitability is driven by gross profits over assets, return on equity, return on assets, cash flow over assets, gross margin, and the portion of earnings that was cash. A quality stock’s growth is determined by the five year average growth in the per share values of the first five profitability factors, while a stock’s safety is based on its beta, leverage, bankruptcy risk, and return on equity volatility.
Using these metrics, Asness built two portfolios. The first portfolio selected stocks based on the quality metrics, while the latter, called Quality Minus Junk (QMJ) goes long on the quality stocks and shorts the junk stocks. QMJ is more characteristic of AQR Capital’s investment approach. The results showed that without adjusting for risk, the ten sub quality portfolios starting from a quality score of one and ending at ten all had positive excess returns over Treasury bills.
These returns ranged from 28 basis points of excess returns for the lowest quality portfolio to 70 basis points for the highest quality portfolio. The difference in the highest and lowest returns for these portfolios was the sharpest when they were tuned for the Carhart Four Factor Model that adds momentum to the traditional three factor Fama Factor model. The difference was 105 basis points per month for the four factor adjustment.
Looking at the returns for the QMJ portfolio, these jump to 60 basis points for the four factor model for US stocks and 61 basis points per month for the three and four factor models for global equities. When the US and global monthly excess returns are plotted over time for cumulative alpha, they sit at roughly 425% for the US between 1957 and 2016 and at 200% for global stocks between 1986 and 2012.
Shifting gears, as 2023 proved to be beneficial to the stock market because of returns driven by large cap stocks and artificial intelligence, AQR Capital also posted strong results. As per Reuters, the fund’s Absolute Return Strategy delivered 18.5% in returns in 2023, while the AQR Equity Market Neutral Global Value strategy returned a stronger 20.6% in net returns. Before fees, the Absolute Return’s returns were 55%, with the net, or post fee returns sitting at 43.5% in 2022 according to Bloomberg,
AQR’s double digit performance continued during the first quarter. More data sourced by Bloomberg shows that AQR’s Managed Futures Full Volatility Strategy, Delphi Long Short Equity Strategy, and Apex Strategy gained 17.4%, 13%, and 11%, during Q1 2024. Insider Monkey’s data shows that the cumulative value of the hedge fund’s stock holdings filed with the SEC was $58.7 billion by the end of that time period marking a $13.1 billion or 28.7% annual jump. Double digit returns in a quarter are no small matter, and some of the best known hedge funds such as Citadel Wellington, Point72, and Millennium 5.8%, 5.3%, and 3.7% in respective returns during the same time period.
Before we get to our list of Cliff Asness’ top stock picks, it’s also important to see how his firms’ funds have performed so far during the year. September has marked the start of a paradigm shift on Wall Street in the form of the Federal Reserve starting its interest rate cuts in the form of a 50 basis point cut. However, the Fed’s data seems to have disappointed investors as it indicates that as of mid September, it expects the rate to sit at 3.25% – 3.50% by 2025 end.
When looking at the returns of AQR’s different funds year to date, it appears that momentum is one of the top plays as of now. This is because the AQR Large Cap Momentum Style Fund has delivered 21.70% in year to date returns which is roughly three percentage points higher than the benchmark index’s 18.64% in returns. On the flip side, the AQR Large Cap Defensive Style Fund has delivered 16.11% in year to date returns which are 2.53 percentage points lower than the benchmark’s returns. Judging by this, the momentum fund which touts to invest in stocks “considered to have positive momentum if it has performed well in the prior 12 months relative to other stocks in the investment universe” has been the way to go so far in 2024.
With these details in mind, let’s take a look at the ten best stocks to buy according to Cliff Asness.
Cliff Asness of AQR Capital Management
Our Methodology
To make our list of the ten best stocks to buy according to Cliff Asness, we ranked all the stocks part of his fund AQR Capital’s Q2 2024 13F SEC filings and picked out the most valuable stakes.
For these stocks, we also mentioned the number of hedge fund investors based on Insider Monkey’s research. 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. Broadcom Inc. (NASDAQ:AVGO)
Number of Hedge Fund Holders In Q2 2024: 130
AQR Funds’ Latest Investment Stake: $483 million
Broadcom Inc. (NASDAQ:AVGO) is one of the most diversified technology companies in the world. The firm operates in two highly lucrative technology industries, namely semiconductor design, and software as a service (SaaS). This provides Broadcom Inc. (NASDAQ:AVGO) with considerable advantages in today’s industry as its chips are used across consumer electronics products such as the iPhone. Additionally, the cybersecurity SaaS business provides Broadcom Inc. (NASDAQ:AVGO) with a high margin, recurring revenue business with growth trends already visible in the firm’s latest Q3 after software revenue jumped by 300% on the back of its VMware acquisition. However, potential tailwinds such as Apple deciding to increase the presence of in house chips in its smartphones and a slowdown in AI could spell trouble. This was the case in September when Broadcom Inc. (NASDAQ:AVGO)’s dropped by 10% after its $1 billion AI sales guidance boost did not satiate growth hungry investors.
Here’s what Broadcom Inc. (NASDAQ:AVGO) had to say about this guidance during the Q3 2024 earnings call:
“Well, our number in third quarter is pretty much in line what we expect AI revenue to be. And our revenue in Q4 was — forecast for Q4 is what’s giving us the basis to a large extent to step up our guidance for AI revenue for the full year to over $12 billion. So if nothing else, that continues to indicate, I hope to us, that next year the trend will continue to be strong. And again, it’s all largely hyperscalers, cloud, and digital natives. And it’s again, a mix of AI accelerators and networking. And it’s also largely based on backlog we have in place for that. Beyond that — and it shows the growth. Beyond that, no, we’re not guiding you beyond the backlog we have. So I kind of answer your question indirectly on, do I have any more customers? We shall see.”
9. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Holders In Q2 2024: 80
AQR Funds’ Latest Investment Stake: $489 million
Johnson & Johnson (NYSE:JNJ) is one of the biggest pharmaceutical and general healthcare products providers in the world. This enables it to have fortress income statements and balance sheets, as evidenced by $86.5 billion in trailing twelve month net income and $21.8 billion in cash and equivalents. Johnson & Johnson (NYSE:JNJ)’s scale also means that in case its products face troubles, the costs can be astounding. One of the key factors surrounding its narrative these days is lawsuits that the firm has faced because of its talcum powder for babies. Prior to September, Johnson & Johnson (NYSE:JNJ) had agreed to pay a stunning $700 million in settlements and make progress with plans to make a subsidiary declare bankruptcy to deal with an unbelievable $6.4 billion in lawsuits. September saw some respite for the firm, as an Oregon court overturned a $260 million verdict against the firm. Yet, investors were unimpressed as the stock remained flat during the day. Its resources mean that Johnson & Johnson (NYSE:JNJ) can deal with multi million dollar legal problems and focus on high growth markets, one of which is medical devices.
Here’s what Johnson & Johnson (NYSE:JNJ) management had to say on this front during the Q2 2024 earnings call:
“Turning to MedTech, we continue to advance our pipeline, launch new commercial products and integrate strategic acquisitions that broaden and further differentiate our portfolio. In cardiovascular, we are enhancing our portfolio and shifting into higher growth markets through strategic acquisitions such as Shockwave Medical. In May, we announced the launch of our CARTO 3 Version 8 electroanatomical mapping system. This is the latest version of our 3D heart mapping system, which has machine learning capabilities that increase efficiency, reproducibility, and accuracy in maps electrophysiologists use to treat atrial fibrillation and other arrhythmias. In pulsed field ablation, we initiated the commercial launch of the VARIPULSE platform in the EU and Japan receiving early positive physician feedback in the external evaluation period.
We also delivered results from the pivotal phase of the admIRE trial, where the VARIPULSE platform demonstrated 85% peak primary effectiveness with minimal adverse events, short PFA application times and low fluoroscopy exposure. In orthopedics, we received 510(k) FDA clearance for the clinical application of the VELYS Robotic-Assisted Solution in unicompartmental knee arthroplasty. This is designed for both medial and lateral procedures enabling surgeons to guide precise implant placement without a CT scan. In surgery, we launched the ECHELON 3000 in the U.S., which combines 3D stapling and gripping surface technology to enable greater staple line security. This has been shown to deliver 47% fewer leaks, reduce surgical risks and improve surgical outcomes.”
8. McKesson Corporation (NYSE:MCK)
Number of Hedge Fund Holders In Q2 2024: 70
AQR Funds’ Latest Investment Stake: $500.8 million
McKesson Corporation (NYSE:MCK) is a diversified healthcare products company that sells surgical products, pharmaceuticals, and services that enable healthcare professionals and others to distribute medicines. Given that McKesson Corporation (NYSE:MCK) is one of the biggest firms of its kind as it serves more than 2.1 million people, the firm can benefit from trends in the pharmacy industry. The biggest such trend is for weight loss drugs, and with pharma giants continuing to develop new weight loss drugs and prepare to negotiate with Medicare and Medicaid for existing treatments, McKesson Corporation (NYSE:MCK) could see tailwinds to revenue stemming from greater weight loss coverage. However, the shares have gained a modest 8.76% year to date on the back of weak earnings performance. McKesson Corporation (NYSE:MCK)’s first and second calendar quarter financials saw it post $68.79 billion and $71.7 billion in revenue, respectively. These missed analyst estimates of $71.65 billion and $74.1 billion. After the Q2 report, the stock dropped by 11.34% and by an additional 9.9% in September after McKesson Corporation (NYSE:MCK) announced that it was selling its Canadian pharmacy and eCommerce businesses. Any further earnings weakness could spell more trouble for the shares.
Baron Funds mentioned McKesson Corporation (NYSE:MCK) in its Q2 2024 investor letter. Here is what the fund said:
“McKesson is a leading distributor of pharmaceuticals and medical supplies and also provides prescription technology solutions that connect pharmacies, providers, payers, and biopharmaceutical customers. McKesson’s stock reacted positively to the company’s fiscal year 2025 earnings guidance, which came in ahead of investor expectations. We continue to think McKesson can generate mid-teens earnings per share growth annually through organic growth, operating leverage, and share repurchases.”
7. Alphabet Inc. (NASDAQ:GOOGL)
Number of Hedge Fund Holders In Q2 2024: 216
AQR Funds’ Latest Investment Stake: $504.9 million
Alphabet Inc. (NASDAQ:GOOGL) is the holding company for Google and other businesses. Its primary line of revenue is the Search business, which accounts for 58.6% of the firm’s revenue as of Q2 2024. This means that Alphabet Inc. (NASDAQ:GOOGL) remains highly dependent on Search, and any troubles for the business could create tailwinds. In 2024, the firm saw some such troubles, after a historic court ruling sided with the DOJ by stating that Search was abusing its market dominance. Additionally, the rise of AI could lead to AI based search that might eat market share away from Alphabet Inc. (NASDAQ:GOOGL). However, on the AI front, it is one of the strongest firms in the world. Alphabet Inc. (NASDAQ:GOOGL) designs its own tensor processors for AI use and also has access to a foundational model via Bard. These enable to provide AI training capacity to others, such as Apple, and allow businesses to build their AI products through the Google Cloud business.
Patient Capital Management mentioned Alphabet Inc. (NASDAQ:GOOGL) in its Q2 2024 investor letter. Here is what the firm 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.”
6. The Cigna Group (NYSE:CI)
Number of Hedge Fund Holders In Q2 2024:
AQR Funds’ Latest Investment Stake: $510 million
The Cigna Group (NYSE:CI) is a diversified healthcare benefits and insurance company. Its two primary business lines are pharmacy and healthcare insurance and benefits. Out of these, pharmacy contributes the most to The Cigna Group (NYSE:CI)’s revenue as, during H1 2024, $87.1 billion out of the firm’s $117.7 billion, or 74% came through this division. This makes pharmacy performance a key part of The Cigna Group (NYSE:CI)’s hypothesis, and with more than 62,000 pharmacies in its network, the firm enjoys considerable advantages in terms of market share, low costs, and industry partnerships. Additionally, compared to McKesson, The Cigna Group (NYSE:CI)’s shares have done well over the year and are up by 15% year to date. The firm benefits from its diversified model by being able to operate in different markets such as specialty and generic. This is key, as the specialty business also enables The Cigna Group (NYSE:CI) to target the biosimilar market which enables greater healthcare access for rare and other diseases by selling similar drugs to reference treatments.
The Cigna Group (NYSE:CI)’s management shared details for its Specialty business during the Q2 2024 earnings call:
“In Accredo, our specialty business, our growth continues to be fueled by secular tailwinds as well as Accredo’s differentiated strength which makes us the market leader in the space. Biosimilars, for example, represent a force of change and a substantial opportunity for continued growth and impact. At the end of June, we began dispensing our interchangeable biosimilar for Humira. Our program has zero dollar out-of-pocket cost for patients, saving them on average $3,500 per year. To deliver these savings, we have agreements in place with multiple manufacturers that will produce biosimilars for Evernorth pharmaceutical distributor, Quallent Pharmaceuticals. Now the biosimilar opportunity goes well beyond Humira. By 2030, we expect an additional $100 million of annual specialty drug spend in the U.S. will be subject to biosimilar and generic competition.
And Accredo is well positioned to deliver differentiated value for our clients, customers and patients.”
5. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Holders In Q2 2024: 219
AQR Funds’ Latest Investment Stake: $811 million
Meta Platforms, Inc. (NASDAQ:META) is the parent company of Facebook, Instagram, and WhatsApp. With more than 3.2 billion people using its platform as of March 2024, the firm enjoys a considerable presence in the social media industry. This is key for Meta Platforms, Inc. (NASDAQ:META), as it enables it to ensure that advertisers are eager to run their ads on its platform. Ad revenue is one of the biggest revenue streams for the firm, and it has grown in importance as of late due to Meta Platforms, Inc. (NASDAQ:META)’s aggressive AI investments. Key drivers for its share price include revenue per user, the ability to monetize AI, and maintain or grow its user base. Meta Platforms, Inc. (NASDAQ:META) is also using AI to enable advertisers to autonomously create campaigns and general users to make use of AI through AI Studio. Additionally, Meta Platforms, Inc. (NASDAQ:META)’s forward price to earnings ratio of 22.32 means that the share growth might be rapid.
Since monetizing AI is one of the keys to Meta Platforms, Inc. (NASDAQ:META)’s hypothesis, here’s what Evercore’s Mark Mahaney had to say during a recent talk with CNBC:
“If you look at what happened with Meta Platforms Inc (NASDAQ:META). they went to almost 30% revenue growth, they are growing dollar-wise faster than anybody else that’s because they used AI to rebuild their ad-tech stack because they used AI to rebuild their user interface and get us more engaged, so it actually worked for them.”
4. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Holders In Q2 2024: 308
AQR Funds’ Latest Investment Stake: $1 billion
Amazon.com, Inc. (NASDAQ:AMZN) is an American eCommerce and cloud computing company. The firm has one of the widest and most stable moats on Wall Street due to its dual business. Amazon.com, Inc. (NASDAQ:AMZN)’s eCommerce operations provide it access to a sizeable market where it leads in the market by attracting billions of users (3.25 billion in June) to its website. Its scale also allows Amazon.com, Inc. (NASDAQ:AMZN) to enjoy competitive advantages such as a click to door speed of 1.9 days. Additionally, the cloud computing business enables the firm to beef up its margins, which are notoriously low for the eCommerce sector. It also provides Amazon.com, Inc. (NASDAQ:AMZN) exposure to the AI industry, where it is one of the leaders due to its presence in all layers of the AI stack. This ranges from designing its own chips to having access to a foundational AI model via Claude, and AI end products through AWS.
Albyn Capital Management mentioned Amazon.com, Inc. (NASDAQ:AMZN) in its Q2 2024 investor letter. Here is what the firm said:
“In his annual letter to shareholders, CEO Andy Jassy underscores Amazon’s commitment to “primitive services” over the last 20 years – creating foundational building blocks that empower rapid development of higher level products and services. Examples include developing core functionalities like payments and search, which eventually led to the Fulfilled by Amazon service, or developing logistics infrastructure, which led to the Buy with Prime service. Amazon is adopting the same approach to the next front, GenAI, from custom AI chips and training/deployment services to empower companies to construct their own core GenAI models, to their Bedrock service which allows customers to use pre-existing models to more quickly develop applications, to Amazon developing their own applications for internal use (think Alexa and a new shopping AI called Rufus).
Amazon’s dominance comes not just from its scale but also from a relentless “customer obsession,” exemplified by its focus on building services that empower customers. This positions Amazon to capture significant shares of the growing retail and cloud markets. With a 45% share of online retail, which only makes up 25% of total retail sales, Amazon is well-placed for growth. The company’s expansion into the grocery sector, backed by investments in same-day delivery, shows promise. Currently, Amazon holds a 20% share of the grocery market, a segment that constitutes 34% of US retail sales but is only 12% penetrated. As online retail trends towards 40-50% penetration, Amazon’s growth potential is meaningful. Similarly, in the cloud sector, only 10% of IT spending has shifted to the cloud, with AWS holding a 35% market share.”
3. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders In Q2 2024: 279
AQR Funds’ Latest Investment Stake: $1.729 billion
Microsoft Corporation (NASDAQ:MSFT) is a global leader in personal and cloud computing. It dominates these markets via its Windows operating system, which is the most widely used worldwide, and its Azure cloud business division. After Amazon AWS, Microsoft Corporation (NASDAQ:MSFT) is the second biggest cloud computing company in the world as it commands a 23% market share. This is key for a cloud company, as it enables stable industry partnerships that allow for recurring revenue. Additionally, the scale of Azure, as evidenced by $28.5 billion of Intelligent Cloud revenue means that Microsoft Corporation (NASDAQ:MSFT)’s hypothesis is geared more towards cost control (an internal affair) as opposed to growth (which is dependent on external factors). The firm is also one of the industry leaders in AI through its partnership with OpenAI which has allowed Microsoft Corporation (NASDAQ:MSFT) to provide AI services to its Azure customers. Yet, this also means that moving forward, its ability to generate AI profits is key as the firm has invested billions into the technology.
Microsoft Corporation (NASDAQ:MSFT) chief Satya Nadella is quite optimistic about SaaS, cloud, and AI. Here’s what he shared during the Q4 2024 earnings call:
“So to me, look, at the end of the day, GenAI is just software. So it is really translating into fundamentally growth on what has been our M365 SaaS offering with a newer offering that is the Copilot SaaS offering, which today is on a growth rate that’s faster than any other previous generation of software we launched as a suite in M365. That’s, I think, the best way to describe it. I mean the numbers I think we shared even this quarter are indicative of this, Mark. So if you look at it, we have both the landing of the seats itself quarter-over-quarter that is growing 60%, right? That’s a pretty good healthy sign. The most healthy sign for me is the fact that customers are coming back there.
That is the same customers with whom we landed the seats coming back and buying more seats. And then the number of customers with 10,000-plus seats doubled, right? It’s 2x quarter-over-quarter. That, to me, is a healthy SaaS core business. And on top of that, some of the things that Amy shared around Dynamic. That’s another exciting place for us, which is one, we are gaining share. We are – Dynamics with the GenAI built-in is sort of really biz app, it’s probably the category that gets completely transformed with GenAI. Contact centers being a great example. We ourselves are on course to save hundreds of millions of dollars in our own customer support and contact center operations. I think we can drive that value to our customers. And then on the Azure side, you see the numbers very clearly.
In fact, I think last quarter is when we started giving you that. You saw an acceleration of that this quarter. One of the other pieces, Mark, is AI doesn’t sit on its own, right? So it’s just for – we have a concept of design wins in Azure. So in fact, 50% of the folks who are using Azure AI are also using a data meter. That’s very exciting to us because the most important thing in Azure is to win workloads in the enterprise. And that is starting to happen. And these are generational things once they get going with you. So that’s, I think, how we think about it at least when I look at what’s happening on our demand side.”
2. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders In Q2 2024: 184
AQR Funds’ Latest Investment Stake: $1.73 billion
Apple Inc. (NASDAQ:AAPL) dominates the global consumer electronics industry courtesy of the iPhone. SEC filings show that 52% of the firm’s revenue comes from smartphones. Consequently, the iPhone is the central pillar on which Apple Inc. (NASDAQ:AAPL)’s hypothesis rests as it allows the firm to have a user base of roughly 1.46 billion users. This user base is used by investors to gauge the firm’s future revenue by estimating when these users will upgrade their devices. The iPhone’s strength has also enabled Apple Inc. (NASDAQ:AAPL) to create a $78 billion Services business by providing software service and taking payments from Google to make Google Search the default platform on its devices. Consequently, investors are also evaluating Apple Inc. (NASDAQ:AAPL) for its ability to monetize consumer AI services through Apple Intelligence. Furthermore, any iPhone upgrade weakness or government action that stops Google’s payments could spell trouble for Apple Inc. (NASDAQ:AAPL)’s stock.
Baron Funds mentioned Apple Inc. (NASDAQ:AAPL) in its Q2 2024 investor letter. Here is what the firm said:
“Recent Activity This quarter we re-initiated a position in Apple Inc., a leading technology company known for its innovative consumer electronics products like the iPhone, MacBook, iPad, and Apple Watch. Apple is a leader across its categories and geographies, with a growing installed base that now exceeds 2 billion devices globally. The company’s attached services – including the App Store, iCloud, Apple TV+, Apple Music, and Apple Pay – provide a higher margin, recurring revenue stream that both enhances the value proposition for its hardware products and improves the financial profile. Apple now has well over 1 billion subscribers paying for these services, more than double the number it had just 4 years ago. The increasing services mix has led to healthy operating margin improvement, providing more free cash flow for Apple to reinvest in the business and to distribute to shareholders. Throughout its 48-year history, Apple has successfully navigated and capitalized on major technological shis, from PCs to mobile to cloud computing. We believe the company’s leading brand and device ecosystem position it to do equally well in the AI age, and this was the driver of our decision to re-invest. “Apple Intelligence” – the AI strategy unveiled at Apple’s recent Worldwide Developer Conference – leverages on- device AI and integrations with tools like ChatGPT to enhance user experiences across its ecosystem. The AI suite enables users to create new images, summarize and generate text, and use Siri to perform actions across their mobile applications, all while maintaining user privacy and security. We think Apple Intelligence can drive accelerated product upgrade cycles and higher demand for Apple services. The combination of growth re-acceleration, increasing services contribution, and thoughtful capital allocation should continue driving long-term shareholder value.”
1. NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Holders In Q2 2024: 179
AQR Funds’ Latest Investment Stake: $1.92 billion
NVIDIA Corporation (NASDAQ:NVDA) is the world’s leading GPU designer. Its chips are the top performers in the industry when it comes to computing AI workloads and enabling accelerated computing. This has enabled NVIDIA Corporation (NASDAQ:NVDA) to transform itself from a firm that sold gaming GPUs to an enterprise and data center products provider. Subsequently, its hypothesis rests on the accelerated computing and AI associated demand for its GPUs and the ability to keep costs low. A slowdown on any of these fronts could see investors reevaluate their views on NVIDIA Corporation (NASDAQ:NVDA) and price out the future revenue growth estimates that have propelled the stock to a market capitalization of $2.92 trillion. Since NVIDIA Corporation (NASDAQ:NVDA) enjoys considerable design advantages, it can continue to be the primary industry GPU supplier for the future. However, large firms like Meta and Google might increase the presence of their own chips in infrastructure to create headwinds. Additionally, a lack of industry AI adoption could spell trouble.
Baron Funds mentioned NVIDIA Corporation (NASDAQ:NVDA) in its Q2 2024 investor letter. Here is what it 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 effectively 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.”
NVDA tops our list of Cliff Asness’ best stock picks. 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 NVDA 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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