In this article, we discuss the 11 most promising AI stocks according to hedge funds. To skip the detailed analysis of the AI industry, go directly to the 5 Most Promising AI Stocks According to Hedge Funds.
Artificial intelligence (AI) was a market savior in 2023. In 2022, when the Fed aggressively started to increase the interest rates to fight off the 40-year high inflation, most analysts were sure about the US economy going into a recession in 2023. However, they were proven wrong, as AI was like a wrecking ball that demolished all the predictions made by the bears. The S&P 500 is up 24.5% year-to-date (YTD) at the time of writing on December 19. The index owes most of its gains to the “Magnificent 7”, a term coined by Bank of America analyst Michael Hartnett for the top-performing tech stocks listed on the US stock exchange.
As per our previous report, the Magnificent 7 stocks, including Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), Meta (NASDAQ:META), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), and Tesla (NASDAQ:TSLA), averaged collective gains of 50.65% while the rest of the S&P 493 declined by 2.05% in the first nine months of 2023.
Generative AI became the key driver of technology sector growth after the release of Microsoft Corporation (NASDAQ:MSFT) backed OpenAI chatbot ChatGPT. After that, several companies came up with their own generative AI tools used for several purposes, including but not limited to, text-to-image and video generation, music creation, and production of campaign ads. The semiconductor company NVIDIA Corporation (NASDAQ:NVDA) has been the star performer of the market throughout the year as it manufactures and sells products used to power and train generative AI tools. The company’s stock is up 244.36% YTD at the time of writing on December 19. Furthermore, Advanced Micro Devices, Inc. (NASDAQ:AMD) also unveiled its new artificial intelligence accelerator, Instinct MI300X. According to the company’s CEO, it is the most advanced accelerator in the industry and is becoming a tough competitor for NVIDIA Corporation (NASDAQ:NVDA)’s H200 graphic processing unit.
While several analysts and experts predict a slowdown or correction in the AI space, the rest of the market is quite positive about its future. One of the main reasons behind this is that AI is revolutionizing most of the industries of the market. The technology is bringing advancements in the automotive industry, which is evident in autonomous driving technology, mainly dependent on artificial intelligence. Artificial intelligence is also disrupting the healthcare segment as it is innovating the processes used for diagnosis and treatment, data management, mental health, and drug discovery. According to Morgan Stanley, AI will account for 10.5% of the healthcare budgets in 2024, almost double from the 2022 levels.
Cathie Wood of ARK Invest also keeps a positive sentiment toward the AI sector. Wood’s firm purchased 3.8 million shares of AI-driven drug discovery company Recursion Pharmaceuticals, Inc. (NASDAQ:RXRX) in mid-November. She believes that AI will be a part of every sector in the future. Cathie Wood’s Ark Innovation ETF (ARKK), which tracks disruptive technologies, including AI, has gained nearly 73% YTD at the time of writing on December 19. Ark Invest’s Big Ideas 2023 report says:
“Computational systems and software that evolve with data can solve intractable problems, automate knowledge work, and accelerate technology’s integration into every economic sector. The adoption of Neural Networks should prove more momentous than the introduction of the internet and create 10s of trillion dollars of value. At scale these systems will require unprecedented computational resources, and AI-specific compute hardware should dominate the Next Gen Cloud datacenters that train and operate AI models. The potential for end-users is clear: a constellation of AI-driven Intelligent Devices that pervade people’s lives, changing the way that they spend, work, and play. The adoption of artificial intelligence should transform every sector, impact every business, and catalyze every innovation platform.”
Artificial intelligence is expected to be the fastest-growing industry in the technology sector, reaching a market size of $2.57 trillion by 2032 from $454.12 billion in 2022, registering a compound annual growth rate of 19%. Keeping that in mind, some of the most promising AI stocks according to hedge funds include Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and Meta Platforms, Inc. (NASDAQ:META).
Pixabay/Public Domain
Our Methodology
For this article, we made a list of AI stocks using Insider Monkey’s proprietary hedge fund database that tracks 910 elite hedge funds as of the third quarter of 2023. From that list, we chose the companies with the highest number of hedge fund investors. Furthermore, we skipped the stocks whose hedge fund sentiment or dollar value of hedge fund investments dropped significantly in the third quarter.
The most promising AI stocks according to hedge funds, are listed in ascending order of their hedge fund sentiment.
11 Most Promising AI Stocks According to Hedge Funds
11. ServiceNow, Inc. (NYSE:NOW)
Number of Hedge Fund Holders: 99
ServiceNow, Inc. (NYSE:NOW) is a California-based company that offers enterprise cloud solutions with new generative AI capabilities integrated across its product portfolio.
On November 29, ServiceNow, Inc. (NYSE:NOW) announced that it entered into a collaborative agreement with Amazon.com, Inc. (NASDAQ:AMZN) to introduce its platform and solutions into Amazon Web Services (AWS) Marketplace as a Software-as-a-Service (Saas) offering.
ServiceNow, Inc. (NYSE:NOW) is one of the most promising AI stocks according to hedge funds, along with Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and Meta Platforms, Inc. (NASDAQ:META).
ClearBridge Investments mentioned ServiceNow, Inc. (NYSE:NOW) in its third quarter 2023 investor letter. Here is what it said:
“ServiceNow, Inc. (NYSE:NOW) is a leading provider of workflow automation software. We see the company as a key enabler of modernization and digital transformation, which is well-positioned as enterprises look to converge on a single platform solution. Despite its sizable customer base, we believe ServiceNow still has substantial room to expand spending with existing customers, as most have not fully leveraged its full product suite. We also are encouraged by the company’s strong leadership team and history of innovation which should enable it to continue to expand wallet share. Additionally, despite ongoing investments in growth, ServiceNow continues to drive healthy operating leverage.”
10. Advanced Micro Devices, Inc. (NASDAQ:AMD)
Number of Hedge Fund Holders: 110
Advanced Micro Devices, Inc. (NASDAQ:AMD) is a California-based company that designs, manufactures, and markets semiconductors and microprocessors. The company designs and sells AI-related hardware and provides AI solutions to its customers.
According to Insider Monkey’s database that tracks 910 hedge funds, the number of hedge funds with investments in Advanced Micro Devices, Inc. (NASDAQ:AMD)’s stock went down to 110 in Q3 from 112 in Q2, but the total stake value increased to $9.156 billion in Q3 from $6.93 billion in Q2. Ken Fisher’s Fisher Asset Management was the top investor, with 27.768 million shares worth $2.855 billion.
On December 6, Advanced Micro Devices, Inc. (NASDAQ:AMD) introduced its AI accelerator Instinct MI300X at its Advancing AI event. The company reiterated its revenue expectation of $2 billion from MI300 in 2024.
Artisan Partners commented on Advanced Micro Devices, Inc. (NASDAQ:AMD) in its second quarter 2023 investor letter. Here is what it said:
“Among our top contributors were Advanced Micro Devices, Inc. (NASDAQ:AMD), NU Holdings and Netflix. AMD’s data center CPUs are used in the cloud service provider (CSP) servers. In addition to the broader secular tailwind from cloud adoption, the company has a performance and pricing advantage over Intel, which we believe will enable it to continue capturing market share. However, the recent stock price rally was due to growing excitement around the company’s AI exposure. It will launch its new MI300 graphics processing unit (GPU) chip later this year to compete against the dominant market leader NVIDIA. Similar to its approach that won market share from Intel within the CPU market, AMD’s product will aim to provide similar performance at a more attractive price. AMD is already working with Microsoft and Meta, while Amazon publicly stated that it is evaluating AMD’s inferencing chips. Using assumptions around the total GPU market size, potential market share gains and price points, our research indicates this could be a $20 billion opportunity for AMD. That would nearly double its revenue. While the company has not historically missed many deadlines, there is execution risk as it works to manufacture and distribute these complex chips at scale, which, combined with an elevated valuation after the stock’s strong performance run, led us to trim the position.”
9. Adobe Inc. (NASDAQ:ADBE)
Number of Hedge Fund Holders: 112
Adobe Inc. (NASDAQ:ADBE) is a software company that has AI products in its portfolio including, Adobe Sensei and Adobe Firefly.
On December 13, Adobe Inc. (NASDAQ:ADBE) posted its Q4 non-GAAP EPS of $4.27, topping the analysts’ estimates by $0.13. The revenue jumped 11.5% year-over-year (YoY) to $5.05 billion, which beat the estimates by $30 million.
30 Wall Street analysts covered Adobe Inc. (NASDAQ:ADBE) over the last three months, and 24 kept a Buy rating on the stock. At the time of writing on December 19, the average price target of $650.07 represented an upside of 7.01%.
Adobe Inc. (NASDAQ:ADBE) was mentioned in Polen Capital’s third-quarter 2023 investor letter. Here is what it said:
“Both Alphabet and Adobe’s businesses continue to perform well. With respect to Adobe, the most recent quarter delivered more of the same with constant currency revenue growing 13%, margin expansion, and over 2% of shares outstanding repurchased for non-GAAP earnings growth of over 20%. We believe its approach to GenAI through Firefly, which guarantees safe content because it trains on Adobe Stock, will continue to be attractive to enterprises. The counter to GenAI, and something we are keeping an eye on with Alphabet and Adobe, is that it requires heavy investment. While both businesses can leverage their scale and manage costs in other areas, we expect the investment in future growth through GenAI will weigh on company-wide margins over the near term.”
8. Salesforce, Inc. (NYSE:CRM)
Number of Hedge Fund Holders: 122
Salesforce, Inc. (NYSE:CRM) is a cloud-based software company. Its two main AI tools are Salesforce Einstein and Einstein GPT.
On December 18, Wolfe Research analyst Alex Zukin upgraded Salesforce, Inc. (NYSE:CRM)’s stock to an Outperform rating from a Peer Perform rating with a $315 price target. The analyst expects the company to witness double-digit topline growth due to several factors, including AI, pricing, and more.
On November 29, Salesforce, Inc. (NYSE:CRM) announced its Q3 earnings result with a non-GAAP EPS of $2.11, surpassing the estimates by $0.05. The revenue of $8.72 billion grew 11.2% YoY.
Harding Loevner commented on Salesforce, Inc. (NYSE:CRM) in its second-quarter 2023 investor letter. Here is what it said:
“Salesforce, Inc. (NYSE:CRM), a company we’ve owned since 2019, recently added ChatGPT-like capabilities onto its existing Al module, Einstein, to support its internal sales efforts and customer-facing software. For example, Einstein GPT can help generate marketing emails tailored to specific clients by using Salesforce’s customer database and past email correspondence to learn the most effective approach for each client. Einstein GPT is also different from off-the-shelf LLMS in three important ways: It keeps personal identifiable information private and secure, compared with external tools that retain anything a user enters. It employs the latest data in Salesforce’s system, as opposed to the sometimes-stale public data that train generic models. And generative Al capabilities can be integrated with other Salesforce offerings; the company has already introduced Slack GPT and Tableau GPT, Al-equipped versions of its workplace collaboration and analytics tools.”
7. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders: 134
Apple Inc. (NASDAQ:AAPL) is one of the biggest tech companies in the world and integrates AI and machine learning in its products and services like Siri, Apple GPT chatbot, etc.
According to Insider Monkey’s database, Apple Inc. (NASDAQ:AAPL) had the highest total hedge fund investments at $179.018 billion, with 134 funds bullish on the stock in the third quarter. Warren Buffett’s Berkshire Hathaway was the most significant stakeholder in the company, with 915.560 million shares worth $156.753 billion, representing 50.03% of the fund’s portfolio.
On December 19, Apple Inc. (NASDAQ:AAPL) reported that it signed a deal with The New York Times Company (NYSE:NYT) to add The Athletic to Apple News+. Eddy Cue, Apple’s senior vice president of services, commented that millions of Apple News+ subscribers will love the addition.
Hayden Capital commented on Apple Inc. (NASDAQ:AAPL) in its third quarter 2023 investor letter. Here is what it said:
“Even Berkshire Hathaway’s most famous investment of the last decade – Apple Inc. (NASDAQ:AAPL) – was based on a similar set up. When Berkshire invested in 2016, Apple’s subscription revenues were just starting to cross ~10% of total revenues. Today, that figure is ~25%.
While operating income has grown +90% from 2016 to 2023, the valuation multiple itself has expanded by ~300%, from ~6x EV/EBIT to ~24x EV/EBIT today.
Investors have evolved their perception of Apple’s products – from that of a “fad” hardware company at risk of competition, to that of a “consumer staple”, a necessary part of a household’s budget…” (Click here to read the full text)
6. Uber Technologies, Inc. (NYSE:UBER)
Number of Hedge Fund Holders: 146
Uber Technologies, Inc. (NYSE:UBER), the famous ride-hailing service provider, has been investing significantly to bring AI to its services. Other than working on its very own AI chatbot, the company is collaborating on autonomous vehicles with Alphabet Inc. (NASDAQ:GOOGL)’s Waymo.
On December 13, JPMorgan raised the price target on Uber Technologies, Inc. (NYSE:UBER)’s stock to $76 from $62 and maintained an Overweight rating. The analyst highlighted the company’s inclusion in the S&P 500 Index, estimated free cash flow of $5.3 billion in 2024, and
supply tailwinds.
Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and Meta Platforms, Inc. (NASDAQ:META) are some of the most promising AI stocks according to hedge funds besides Uber Technologies, Inc. (NYSE:UBER).
RiverPark Advisors mentioned Uber Technologies, Inc. (NYSE:UBER) in its third quarter 2023 investor letter. Here is what it said:
“Uber Technologies, Inc. (NYSE:UBER): UBER was the top contributor in the quarter following a better-than-expected 2Q23 earnings report and 3Q23 guidance. Gross bookings of $33.6 billion were up 16% year over year. Mobility gross bookings of $17 billion grew 25% over last year driven by a combination of product innovation and driver availability. Delivery gross bookings of $16 billion were up 12% from last year. 2Q Adjusted EBITDA of $916 million, up $552 million year over year, significantly beat Street estimates of $845 million and the company generated $1.1 billion of free cash flow. Management guided to continuing growth in 3Q Gross Bookings (17%-20% growth) and Adjusted EBITDA (of $975-1,025 million).
UBER remains the undisputed global leader in ride sharing, with a greater than 50% share in every major region in which it operates. The company is also a leader in food delivery, where it is number one or two in the more than 25 countries in which it operates. Moreover, after a history of losses, the company is now profitable, delivering expanding margins and substantial free cash flow. We view UBER as more than just ride sharing and food delivery, but also as a global mobility platform with the ability to sell to its 130 million users (by comparison, Amazon Prime has 200 million members) and penetrate new markets of on-demand services, such as package and grocery delivery, travel, and worker staffing for shift work. Given its $4.3 billion of unrestricted cash and $4.4 billion of investments, the company’s enterprise value of $95 billion equates to just over 20x next year’s estimated free cash flow.”
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Disclosure. None. 11 Most Promising AI Stocks According to Hedge Funds is originally published on Insider Monkey.
