Artificial intelligence has become a dominant force in the stock market, driving the performance of top companies and capturing the attention of major investors. Insider Monkey’s Q3 data reveals that 15 of the 20 companies most favored by hedge funds are deeply involved in AI, reflecting its growing influence across industries. The Magnificent 7 stocks, which include tech giants leading the AI revolution, remain the most widely held by hedge funds, highlighting their central role in shaping market trends.
The AI boom continues to surge, fueled by companies not just adopting but spearheading advancements in this transformative technology. As valuations for AI-driven stocks climb to unprecedented levels, the sustainability of this rally comes into question. Can the sector’s rapid growth justify its soaring price tags, or is a market correction inevitable? Investors remain on edge, closely monitoring the balance between innovation and valuation.
The AI Revolution: Perspectives from Industry Titans
According to a CNBC report, Nvidia CEO Jensen Huang described the “AI computing ramp” as being in its early stages, with years of growth ahead, predicting AI-driven advancements in fields like science and healthcare. CrowdStrike CEO George Kurtz highlighted how AI is enabling both cybercriminals and cybersecurity efforts, calling it the future “battle of AI.” Snowflake CEO Sridhar Ramaswamy emphasized generative AI’s role in democratizing enterprise data, noting ongoing collaborations and a robust AI product pipeline.
AMD CEO Lisa Su discussed the competitive semiconductor market, stating that different computing architectures are needed for AI’s diverse applications and stressing that AI’s full impact will unfold over the years. Lastly, Generac CEO Aaron Jagdfeld pointed to increasing power grid pressures due to AI-related technology demands, emphasizing the growing need for backup solutions for critical facilities.
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How Data Centers Are Straining Power Quality Across the U.S.
While AI is so far looking like a force for good, it is coming with its own challenges. According to the Bloomberg report, AI Needs So Much Power, It’s Making Yours Worse, the U.S. power grid is facing growing challenges from “bad harmonics,” which occur when electrical wave patterns deviate from the ideal. These distortions can damage home appliances, increase fire risks, and signal deeper grid issues. Data shows that households near data centers experience more severe harmonics, with over half of homes with the worst distortions located within 20 miles of major data center activity. In areas like Northern Virginia, where data centers dominate, the proportion of homes experiencing high harmonic distortions exceeds the national average fourfold.
Whisker Labs, using a million residential sensors, reports that 1.7% of sensors nationwide exceeded the 8% distortion threshold, a figure that jumps to 6% in areas like Prince William County, Virginia, the report states. While some utilities dispute these findings, the data highlights how data centers, combined with aging infrastructure, electrification trends, and extreme weather, are straining the grid.
Tech Giants Turn to Nuclear Power to Address Surging Data Center Energy Needs
As the electricity demand for data centers increases, Big Tech is looking toward nuclear fuels to meet the demand. For example, Reuters reported that Amazon has signed three agreements to develop small modular reactors (SMRs) to address the growing power demand from data centers. One project, in collaboration with X-Energy, will be based near a Northwest Energy site in Washington state and aims to generate up to 960 MW, enough to power over 770,000 homes.
The company is also funding a $500 million round for X-Energy’s SMR development, targeting over 5 gigawatts of capacity by 2039. These moves come as U.S. data center power usage is set to triple by 2030. It has also partnered with Dominion Energy for an SMR project in Virginia.
For this article, we selected AI stocks by going through news articles, stock analysis, and press releases. We listed the stocks in ascending order of their hedge fund sentiment taken from Insider Monkey’s database of 900 hedge funds.
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).
9. Jabil Inc. (NYSE:JBL)
Number of Hedge Fund Holders: 45
Jabil Inc. (NYSE:JBL) is integrating AI, cyber-physical systems, and augmented reality (AR) into its operations to improve supply chain agility and respond to shifting demands, risks, and unforeseen events. It is also collaborating with partners like Microsoft to drive innovation and accelerate product development.
Bank of America Securities analyst Ruplu Bhattacharya maintained a Buy rating on Jabil (NYSE:JBL) and raised the price target from $150 to $165. The rating reflects Jabil’s strong financial results, surpassing revenue and earnings expectations in Q1. The company is poised for continued growth, particularly in its Intelligent Infrastructure sector. Jabil’s strategic focus on high-margin markets and AI-related opportunities, along with strong cash flow and capital return efforts, supports its positive outlook. Despite risks like tariffs, Bhattacharya is confident in Jabil’s growth potential for the second half of the fiscal year.
8. Accenture plc (NYSE:ACN)
Number of Hedge Fund Holders: 60
Accenture plc (NYSE:ACN) offers AI-powered services including data and AI solutions, automation, and intelligent platforms, serving industries such as communications, banking, healthcare, and energy. Additionally, the company collaborates with Kyoto University to promote research and innovation in human-centered AI.
Sachin Mittal of DBS has maintained a Hold rating on Accenture (ACN) with a price target of $360. The rating reflects strong financial performance, with recent results exceeding expectations, and Accenture’s investments in AI, which are expected to drive future growth. However, the cautious outlook is due to potential macroeconomic challenges, including reduced IT spending and the risk of recession, which may impact smaller deals and lead to cost-cutting measures. Despite positive growth prospects in managed services, the overall economic uncertainties have led to a conservative stance.
7. HubSpot, Inc. (NYSE:HUBS)
Number of Hedge Fund Holders: 63
HubSpot, Inc. (NYSE:HUBS) provides a cloud-based CRM platform offering tools for marketing, sales, customer service, and operations automation. Its AI-driven features include data unification, process automation, and customer insights to improve business performance.
Bank of America increased its price target for HubSpot (NYSE:HUBS) to $850 from $780 and maintained a Buy rating. Following investor meetings with CEO Yamini Rangan, the firm remains optimistic about HubSpot’s growth prospects. The firm is more confident in the company’s potential for growth to accelerate in the mid-20s, supported by AI and a favorable macroeconomic environment heading into FY25.
HubSpot has been making significant AI moves in December. Earlier this month, the company agreed to acquire Frame AI to enhance its AI capabilities by turning unstructured data into actionable insights. The integration will improve marketing, sales, and customer service through advanced conversation intelligence.
6. Snowflake Inc. (NYSE:SNOW)
Number of Hedge Fund Holders: 71
Snowflake Inc. (NYSE:SNOW) is a prominent cloud-based data platform provider that leverages AI to improve its offerings. The company applies AI for optimizing data management, delivering advanced insights, enhancing data security, automating data engineering, and advancing data science capabilities.
Loop Capital increased its price target for Snowflake from $185 to $205, reaffirming its Buy rating. The firm noted that discussions with management, field teams, and potential customers indicate stable business fundamentals, suggesting software companies are likely to report December results that meet or slightly exceed expectations. Snowflake, in particular, is seen as having significant growth potential due to key factors like a robust product cycle driving increased workloads, recent go-to-market changes aimed at boosting usage and growth, and opportunities tied to Generative AI.
5. ServiceNow, Inc. (NYSE:NOW)
Number of Hedge Fund Holders: 78
ServiceNow, Inc. (NYSE:NOW) provides AI-driven workflow automation, integrating machine learning, process mining, and robotic process automation to support digital transformation.
Raymond James initiated coverage of ServiceNow with an Outperform rating and a $1,200 price target, highlighting its long-term growth potential despite near-term valuation challenges. Analysts, led by Adam Tindle, noted ServiceNow’s strong growth at scale, referencing historical data showing that software firms exceeding $10B in revenue and growing over 20% have significantly outperformed the market over 5- and 10-year periods. They see a significant Generative AI monetization opportunity for ServiceNow, ranging from hundreds of millions to several billion dollars, supported by its established presence in enterprise operations, strong financial position, and focus on innovation.
4. Salesforce, Inc. (NYSE:CRM)
Number of Hedge Fund Holders: 116
Salesforce, Inc. (NYSE:CRM) incorporates AI into its CRM platform, providing tools for predictive analytics, customized customer insights, and workflow automation. These AI-powered solutions assist businesses in streamlining processes, forecasting results, and improving customer engagement across various sectors.
Salesforce CEO Marc Benioff promoted the company’s AI agents in a Yahoo Finance interview. In another Yahoo Finance interview, D.A. Davidson analyst Gil Luria tempered expectations about their revenue impact. He noted that Salesforce’s proposed per-transaction pricing model could worry customers, as high usage might lead to unpredictable costs. While the approach may take time for customers to adapt, Luria believes it will likely contribute only modestly to revenue next year. This comes as Salesforce is projected to approach $40 billion in revenue, making the AI agents less impactful on its overall financial performance.
3. Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
Number of Hedge Fund Holders: 158
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is dedicated to advancing AI technologies by creating cutting-edge semiconductor processes for various industries.
Kyodo News reported that Taiwan Semiconductor (NYSE:TSM) has begun mass production at its first factory in Kumamoto Prefecture, Japan, producing 12 to 28-nanometer logic chips for industries such as automotive and image sensors, with customers including Sony and Denso. TSMC plans to build a second factory nearby, which will produce more advanced 6-nanometer chips, with construction set to start by March 2025 and operations expected by late 2027. The Japanese government is providing over 1 trillion yen in subsidies to TSMC to reduce dependence on Taiwan, as geopolitical tensions with China highlight the need for secure domestic chip production.
2. Alphabet Inc. (NASDAQ:GOOGL)
Number of Hedge Fund Holders: 202
Alphabet Inc. (NASDAQ:GOOGL) delivers AI-powered solutions through multiple platforms, enhancing cloud services, business collaboration tools, and consumer products, all while prioritizing the advancement of AI research.
In a recent strategy meeting, Google CEO Sundar Pichai highlighted the critical importance of 2025 for the company, emphasizing the need to address growing competition, regulatory challenges, and AI advancements, CNBC reported. Pichai stressed the urgency of moving faster, particularly focusing on Google’s Gemini AI model, which he sees as key to staying ahead in the evolving tech landscape.
Despite strong performance in areas like search ads and cloud, Google faces significant challenges, including legal scrutiny and competition from emerging AI rivals like OpenAI. Pichai outlined plans to scale Gemini, aiming for a leadership position by focusing on consumer adoption. Additionally, he encouraged employees to embrace a “scrappy” approach, reminiscent of the company’s early days, in response to ongoing cost-cutting measures.
1. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders: 279
Microsoft Corporation (NASDAQ:MSFT) integrates AI into its cloud services, productivity tools, and business solutions to enhance automation, security, and the overall user experience. Its AI efforts cover advanced cloud offerings, AI-powered business software, and cutting-edge language processing and computing technologies.
On December 27, a Microsoft spokesperson clarified to Seeking Alpha that its partnership with OpenAI allows it to tailor and integrate AI models for specific needs, such as suggesting edits in Word or making formatting changes. This comes after reports that Microsoft is considering using non-OpenAI models for its Office 365 Copilot tools, citing concerns over cost and speed for enterprise users. The company emphasized that it uses different models, including those from OpenAI and its own, depending on the task. Reports also suggest Microsoft may be looking to reduce its reliance on OpenAI.
While we acknowledge the potential of Microsoft Corporation (NASDAQ:MSFT) as an investment, our conviction lies in the belief that 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 MSFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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