We recently published a list of Billionaire Paul Singer Says Stay Away from These 7 AI Bubble Stocks; 3 Tech Stocks He’s Buying. Since Western Digital Corp (NASDAQ:WDC) ranks 8th on the list, it deserves a deeper look.
Billionaire Paul Singer’s Elliott Management has reportedly said in a latest letter to investors that mega-cap AI tech stocks are in “bubble land” and Nvidia is “overhyped.” The fund said in its letter that it’s skeptical about the notion that technology companies will keep buying AI chips in high volumes in the future, adding that AI is “overhyped with many applications not ready for prime time”. It also claimed that many AI use cases are “never going to be cost-efficient, are never going to actually work right, will take up too much energy, or will prove to be untrustworthy.” The fund reportedly said in its letter that AI is in effect software that has failed to deliver “value commensurate with the hype”.
The $66 billion Elliott Management founded by billionaire Paul Singer, who is one of the most feared activist investors in the US, said there are “few real uses” of AI other than “summarising notes of meetings, generating reports and helping with computer coding”.
Elliott Management said in its letter that it stayed away from “bubble” stocks included in the Magnificicient Seven group.
Elliott Management last year posted a modest gain of 4.7%. However, it has a record of no down years since the financial crisis in 2008. Since its inception in 1977, the fund has reported just two down years, a feat hard to match in the hedge fund industry.
While Elliott calling mega-cap AI stocks a bubble is a major development, it’s certainly not a surprise. Many investors and market experts have been warning about the hype around major AI stocks.
Here is what Insider Monkey’s founder and Research Director Inan Dogan said about Elliott Management’s latest thoughts on AI stocks:
“I have been saying that NVDA’s market cap assumes that the company will make around $150 billion in profits perpetually which is crazy. Elliott is saying the same thing and it is becoming news! Investors don’t know how to bet on the AI revolution, so the only visible companies that they think will benefit are semiconductor and cloud companies. That’s why they have been piling into NVDA. It doesn’t mean that other tech companies are in a bubble territory. In contrast, if Elliott is right that other megacaps are overspending on NVDA chips right now, this implies that their earnings are understated and they are actually much more profitable and cheaper than Elliott thinks. That’s why NVDA and cloud companies are in different categories. NVDA could be in bubble territory but I am not sure other megacaps in the Magnificient Seven group are in a bubble.”
For this article, we analyzed the top AI stocks in the Mag. 7 group which according to Paul Singer are in a bubble. We also talked about three AI/tech stocks that were in Singer’s portfolio, as of the end of the first quarter of this year. 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).
Paul Singer of Elliott Management
Western Digital Corp (NASDAQ:WDC)
Number of Hedge Fund Investors: 65
Paul Singer owns an $89.7 million stake in Western Digital via Elliott Management as of the end of the June quarter.
Western Digital Corp (NASDAQ:WDC) is one of the top semiconductor picks of Cantor Fitzgerald. The company recently reported quarterly results. Cloud segment revenue jumped 20% on a sequential basis. Overall, the company is seeing a rise in profits amid higher pricing and a shift to premium high-performance products. The cloud business, particularly in high-capacity HDDs for data centers, remains strong.
What are AI-related growth catalysts for Western Digital? How can an SSD and storage devices company be called an AI stock?
The rise of artificial intelligence and its data demands positively impact both HDD and flash demand. Generative AI apps and machine learning require substantial data storage, a tailwind for Western Digital. The company is well-positioned to capitalize on this trend, which is still in its early stages.
During the fiscal Q3 earnings call the company’s management talked about AI-related business trends:
“I would say about the AI demand as it’s coming into focus. I don’t think it’s so much in the results just yet, but we’re seeing where it’s going to impact both businesses. And clearly, one of them you just outlined, which is we’re seeing enterprise SSD demand return, we saw some increase in the last quarter. We expect some increase in this quarter. But really, as we look to the second half, we have customers coming to us wanting the kind of SSDs we built and qualified before the downturn. They just want them in much bigger capacity points, 30 and 60 terabyte capacity points. So it’s the same product just taking it and increasing capacity and going through a qualification on that so we’re in that process with customers.
We also introduced a new SSD that’s more compute focused, which is PCIe Gen 5 product based on BiCS 6, very high performance that plays a little bit different role in the AI training stack and we’re getting very good feedback on that product. It’s being qualified by our starting qualification, we samples. We’re kind of getting rid of the qualification of the hyperscaler and we’re seeing good demand in the enterprise market as well. So we feel like the portfolio set up well as we go into the second half, and we’re seeing a lot of demand show up for people that are very building large amount of infrastructure for model training.”
Overall Western Digital Corp (NASDAQ:WDC) ranks 8th on Insider Monkey’s list titled Billionaire Paul Singer Says Stay Away from These 7 AI Bubble Stocks; 3 Tech Stocks He’s Buying. While we acknowledge the potential of Western Digital Corp (NASDAQ:WDC), 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 WDC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.