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 Meta Platforms Inc (NASDAQ:META) ranks 3rd 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).
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Meta Platforms Inc (NASDAQ:META)
Number of Hedge Fund Investors: 246
Meta Platforms is a key player in the Mag. 7 group of stocks which, according to Elliott Management, are in a bubble.
Meta Platforms Inc (NASDAQ:META) crushed past analyst estimates for its latest quarterly results, giving signs that the huge AI spending it’s doing would bear more results in the future. After the results, Citi said it remains “incrementally positive” on Meta Platforms Inc (NASDAQ:META) shares due to engagement and monetization gains, along with expanding margins. The firm raised its price target for META to $580 from $550.
JPMorgan said it sees AI benefiting Meta Platforms Inc (NASDAQ:META) at three levels: core Family of Apps (FoA) improvements, new opportunities and experiences, and scaling the Metaverse. It also upped META price target to $610 from $480.
Morgan Stanley also liked how Meta Platforms Inc (NASDAQ:META) is improving its recommendation systems and quality with AI.
The market has been reluctant about Meta Platforms Inc (NASDAQ:META) massive spending on AI. What does Meta want to achieve with its AI spending? The company wants to use AI to improve engagement and language models like Llama 3 to improve user interactions, boost engagement, and better monetize its 3.2 billion daily active users.
But can Meta Platforms Inc (NASDAQ:META) sustain this high spending? The company’s free cash flow margin is around 30%, and it’s well on track to report $50 billion in free cash flow this year. Based on this target the stock is trading at around 26 times this year’s free cash flow. Given the current trajectory continues Meta Platforms Inc (NASDAQ:META) can post $58 billion in free cash flow by next year, which means the stock is trading at 21 times next year’s free cash flow. With a whopping $35 billion in net cash, a strong user base, and a key position in the consumer-facing side of the AI industry, Meta Platforms Inc (NASDAQ:META) could be a solid long-term investment.
Polen Focus Growth Strategy stated the following regarding Meta Platforms, Inc. (NASDAQ:META) in its Q2 2024 investor letter:
“In the second quarter, the top relative contributors to the Portfolio’s performance were all names we do not hold: Home Depot, Meta Platforms, Inc. (NASDAQ:META), and AbbVie. Meta Platforms delivered robust results in the period, with revenue growth accelerating in the first quarter. However, revenue comparisons for Meta will become more difficult from here, and its guidance for 2Q revenue fell below market expectations. After the company’s “year of efficiency,” where it cut costs in its core business, management is now indicating another ramp-up in GenAI and metaverse spending, spurring concerns about future profit margins. Metaverse spending, by our calculations, is now over $20 billion per year with little to no expected return on the foreseeable horizon.”
Overall, Meta Platforms Inc (NASDAQ:META) ranks 3rd 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 Meta Platforms Inc (NASDAQ:META), 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 META but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These Stocks.
Disclosure: None. This article is originally published at Insider Monkey.
