In this article, we will take a detailed look at Billionaire Paul Singer Says Stay Away from These 7 AI Bubble Stocks, 3 Tech Stocks He’s Buying.
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
10. Texas Instruments Inc (NASDAQ:TXN)
Number of Hedge Fund Investors: 49
Unlike Mag. 7 stocks which Elliott is broadly bearish on, the fund’s views on TXN are positive as it recently opened a $2.5 billion stake in the company and sent a letter to the management, pushing it for improvements in free cash flow. The letter said:
While many investors, including Elliott, agree with the Company’s long-term strategic vision, TI’s stock has underperformed for its investors. TI’s shareholder returns have lagged peers consistently over a multi-year period, despite TI’s reputation as one of the best-managed semiconductor companies with strong growth prospects and competitive advantages. In fact, TI’s shareholder returns rank in the bottom forty percent of the semiconductor index over every time period in the last decade. Our diagnosis is simple: Investors are concerned that TI appears to have deviated from its longstanding commitment to drive growth of free cash flow per share.
UBS recently published a list of high-quality stocks that also pay dividends. Texas Instruments Inc (NASDAQ:TXN) made it to the list. The stock has a 2.61% dividend yield as of July 3.
Texas Instruments Inc’s (NASDAQ:TXN) valuation has been a concern for many amid a lack of strong growth catalysts. The stock’s forward P/E is 37.80, much higher than the industry median of 24. The average analyst price target on the stock is $181, which is lower than its July 3 closing price of $198. According to data from Yahoo Finance, Wall Street expects Texas Instruments Inc’s (NASDAQ:TXN) earnings to fall by 6% over the next five years on a per-annum basis.
Texas Instruments Inc (NASDAQ:TXN) makes most of its revenue from Industrial applications, Automotive and Personal Electronics. During the first quarter earnings call the management said the industrial segment was down “upper-single digits. The automotive market was down mid-single digits. Personal electronics was down mid-teens. Next, communications equipment was down about 25%.”
“First, we saw personal electronics was the first market that went into the correction. It really is — was the first to come out in the last few quarters, I’d describe it as behaving more seasonal. If you go to the other end of the spectrum, we have, had industrial, which has been declining sequentially from some time. And over the last few quarters, we’ve been talking about how there’s some asynchronous behavior inside of the 12, 13 sectors that we have there. That continued inside of the quarter. So we have got some of the later-cycle sectors that are continuing to decline and declining at double-digit rates. But there are some that are beginning to — begin to slow in the declines and even a couple that grew sequentially.”
Diamond Hill Select Strategy stated the following regarding Texas Instruments Incorporated (NASDAQ:TXN) in its Q2 2024 investor letter:
“Among our top individual contributors in Q2 were Amazon, Texas Instruments Incorporated (NASDAQ:TXN) and Mr. Cooper Group. Shares of semiconductor manufacturing company Texas Instruments rose in Q2 as demand in several of the company’s end markets show signs of recovering. Given the company’s long-term prospects, competitive positioning and scale advantages, we believe the outlook for the company from here is strong.”
9. Pinterest Inc (NYSE:PINS)
Number of Hedge Fund Investors: 64
Elliott Management owns a $971 million stake in Pinterest as of the end of March.
Pinterest Inc’s (NYSE:PINS) biggest strength and moat is its unique niche audience and the fact that it’s playing on its own turf instead of competing with giants like TikTok or Facebook. Over 500 million active users turn to Pinterest Inc (NYSE:PINS) every month with a clear intention: get inspiration for ideas and buy stuff online for their home or office. Women make up two-thirds of Pinterest’s user base, and over 40% are Gen Z, the fastest-growing cohort. The company has taken several steps to better monetize its audience. Since 2023, they’ve enhanced click-through rates, with 97% of lower funnel revenue coming from direct links, more than 80% previously. Pinterest Inc (NYSE:PINS) API initiative for third-party integration is also working, with a whopping 40% of revenue coming from that step. The company talked about this during Q1 earnings call:
“One of our most important initiatives began in earnest in 2023 with our efforts to increase adoption of the API for conversions, which provides a server-to-server connection for advertisers to measure and attribute conversions. I’m pleased to report that we’ve grown the adoption of the API to nearly 40% of total revenue, up from 28% of total revenue at our investor day last September.
As I’ve mentioned previously, revenue from retail advertisers who have adopted the API for conversions tends to grow significantly faster than revenue from those who have not yet adopted. This trend continued to hold in Q1 and underscores our desire to drive more privacy-centric measurement, particularly to lower funnel advertisers where it’s most impactful. We’re seeing a reinforcing effect take place. As advertisers adopt and see the benefits of shopping ads, mobile deep linking, or direct links, they are more incentivized to adopt our privacy-centric measurement.”
Analysts believe Pinterest’s partnership with Amazon will also boost Pinterest Inc (NYSE:PINS) revenue. This year the partnership is expected to bring in about $120 million of incremental revenue.
Meridian Contrarian Fund stated the following regarding Pinterest, Inc. (NYSE:PINS) in its fourth quarter 2023 investor letter:
Pinterest, Inc. (NYSE:PINS) is a social media platform that enables visual discovery and generates revenue mainly through online advertising and e-commerce. Earnings declined after the company saw tremendous user and revenue growth in 2020- 2021 and grew operating expenses as if the pandemic-fueled growth trajectory would continue. Normalized growth trends and a macro slowdown that affected ad spend eventually hurt earnings per share. We believed that Pinterest had a significant opportunity to resume earnings growth because:
- Pinterest has an attractive franchise and appears under-monetized vs. social media peers given how well its user experience lends itself to online shopping. 2. Its new CEO, who led commerce initiatives at Google, may portend a virtuous self-help/self-improvement opportunity to unlock monetization. 3. The high levels of operating expense growth vs. sales prior to our investment provides an opportunity for leverage and expense reductions to improve earnings.
Pinterest’s stock performed well in the quarter as the thesis played out and the company reported strong results while raising 2023 guidance. We pared back our position during the quarter due to stock appreciation and as the investment becomes less contrarian as our thesis plays out.”
8. Western Digital Corp (NASDAQ:WDC)
Number of Hedge Fund Investors: 65
Paul Singer owns an $81 million stake in Western Digital via Elliott Management as of the end of the March 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 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.”
read the full earnings call transcript here.
7. Tesla Inc (NASDAQ:TSLA)
Number of Hedge Fund Investors: 74
Tesla is a key part of Mag. 7 stocks which Elliott Management called bubble stocks.
Amid a decline in EV sales growth, Elon Musk’s only option is to go all-in on AI. After a Twitter poll that overwhelmingly voted in favor of Tesla Inc (NASDAQ:TSLA) investing capital in xAI, Musk’s AI company, the CEO of Tesla said he’d discuss investing $5 billion in xAI with Tesla.
Elon Musk said in a latest earnings call with analysts that massive discounts from Tesla Inc (NASDAQ:TSLA) competitors created headwinds for the company in the most recently reported quarter.
Tesla Inc (NASDAQ:TSLA) has also delayed its robotaxi event until October. All possible catalysts for Tesla stock lie far into the future and the reality is revealing itself to Elon Musk who admitted during the latest earnings call that he’s been overly optimistic about robo taxis.
“It’s difficult, obviously, my predictions on this have been overly optimistic in the past. So I mean, based on the current trend, it seems as though we should get miles between interventions to be high enough that — to be far enough in excess of humans that you could do unsupervised possibly by the end of this year. I would be shocked if we cannot do it next year.”
During the second quarter, Tesla Inc (NASDAQ:TSLA) automotive gross margin fell to 18.47% from 19.22% the previous year. Non-automotive revenue, now 22% of total sales compared to 14.67% in Q2 2023, has a lower gross margin, negatively impacting overall profitability. Tesla Inc (NASDAQ:TSLA) is still heavily reliant on EVs where demand is falling. Tesla energy business is not strong enough to offset declines in the core business.
Cathie Wood recently set a $2600 price target on Tesla Inc (NASDAQ:TSLA) for 2029, which presents a whopping 1300% upside potential from the current levels. Wood thinks the robo taxi project has the potential to deliver $8 to $10 trillion in revenue by 2030.
However, many believe Tesla Inc (NASDAQ:TSLA) won’t be able to live up to the hype around its robo taxi plans. Each robo taxi is expected to have a price target of around $150K to $200K, with some estimates suggesting Tesla Inc (NASDAQ:TSLA) would need about $35 billion to develop a global feet of such cars. Amid inflation and lack of preference for electric cars, American families will probably stay away from spending a fortune on robo taxis, which could cause a blow to Tesla Inc’s (NASDAQ:TSLA) plans in the future.
Alger Focus Equity Fund stated the following regarding Tesla, Inc. (NASDAQ:TSLA) in its Q1 2024 investor letter:
“Tesla, Inc. (NASDAQ:TSLA) is an electric vehicle manufacturer with a technological lead in its large and rapidly growing addressable market. In our view, Tesla is a transportation company that is setting the pace for industry innovation. During the quarter, shares detracted from performance after the company reported fiscal fourth quarter results, where revenues and earnings missed analysts’ estimates. Weaker-than-expected automotive revenues were partly driven by a reduced average selling price, which was down 15% year-over-year. Moreover, management decided to forgo providing volume guidance, though they did acknowledge they are in a lower growth phase given the uncertain consumer environment particularly as it relates to high ticket purchases.”
6. Apple Inc (NASDAQ:AAPL)
Number of Hedge Fund Investors: 150
Apple is an important part of the Mag. 7 group which Elliott Management is bearish on.
Apple Inc (NASDAQ:AAPL) AI initiative Apple Intelligence has started to make sense to Wall Street analysts. Recently, Baird raised its price target on the stock to $240 from $200, citing a potential upgrade cycle in iPhone because of Apple Inc (NASDAQ:AAPL) Intelligence.
Baird analyst William Power said in a note that he estimates a whopping 95% of iPhones in the world will need an upgrade at “some point” to take advantage of Apple Intelligence. The analyst mentioned lower upgrade rates at AT&T and Verizon, suggesting consumers might be waiting for AI-integrated smartphones. Based on this catalyst, the analyst upped his fiscal 2025 iPhone estimates by about 20 million units, now projecting iPhone revenue to reach $216.1 billion, a 9% year-over-year increase, surpassing the consensus estimate of 6% growth. Apple Inc (NASDAQ:AAPL) is expected to generate $418.1 billion in full-year revenue and $7.30 per share in earnings, up from previous forecasts of $394.6 billion and $6.73 per share.
However, the assumption that we will see a huge upgrade cycle of iPhone just because of AI is big and comes with a lot of risks. Apple Inc (NASDAQ:AAPL) trades at a forward PE multiple of around 35x, well above its 5-year average of nearly 27x. Its expected EPS forward long-term growth rate of 10.39% does not justify its valuation, especially with the iPhone upgrade cycle assumption. Adjusting for this growth results in a forward PEG ratio of 3.33, significantly higher than its 5-year average of 2.38.
Polen Focus Growth Strategy stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q2 2024 investor letter:
“The largest relative detractors in the quarter were NVIDIA, Apple Inc. (NASDAQ:AAPL), and Salesforce. In a reversal from some of the concerns driving the stock down in the first quarter, Apple re-emerged as a top performer in the second quarter. The company reported better-than-feared results in its iPhone segment that quelled concerns over weakness in China. Additionally, the company forecast a return to sales growth and announced a $110 billion stock buyback plan, the largest in U.S. history. Later in the period, at its Worldwide Developers Conference, Apple introduced long-awaited new AI features that spurred some optimism around an upgrade cycle for the iPhone and, more generally, the important role Apple may be able to play in the emerging AI landscape. We continue to study Apple closely, which we previously owned the company for many years during its growth phase, to determine if it is poised for another significant revenue and earnings growth period.”
5. Alphabet Inc Class C (NASDAQ:GOOG)
Number of Hedge Fund Investors: 165
GOOG is an important part of the Mag. 7 group of stocks which Singer believes are in a bubble.
Alphabet Inc Class C (NASDAQ:GOOG) shares slipped recently following reports that OpenAI is working on a web search product called SearchGPT. Before that, the stock fell following earnings despite posting strong numbers. Revenue in the second quarter jumped 14% year over year driven by search and Cloud. At a forward P/E of 22, analysts believe Alphabet Inc Class C (NASDAQ:GOOG) continues to be one of the cheapest AI stocks in the market as its valuation remains depressed amid fears caused by an overreaction.
Despite constant alarms going off about its search business, Alphabet Inc Class C (NASDAQ:GOOG) search revenue jumped about 13.7% in the second quarter year over year. As of the end of June, Google has about 91.06% share of the search engine market, just 1.65% lower than the December 2019 levels. With AI overviews and other search initiatives, Alphabet Inc Class C (NASDAQ:GOOG) will be able to stave off any competitors given its dominance in the market.
Cloud and YouTube are two key strong catalysts for Alphabet Inc Class C (NASDAQ:GOOG) shares. During the second quarter, Alphabet’s Cloud revenue rose 28.8% to $10.35 billion, crushing past analysts’ forecasts of $10.16 billion. Alphabet Inc Class C (NASDAQ:GOOG) is on the path to reach a $100 billion revenue run-rate from YouTube Ads and Google Cloud by the end of 2024.
Conventum – Alluvium Global Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q2 2024 investor letter:
“Alphabet Inc. (NASDAQ:GOOG), ie Google / YouTube, returned 20.8%. Although management reported good news – solid quarterly results, the expectation of margin expansion throughout 2024, as well as a maiden dividend (to add to its share repurchases) – we suspect the share price bounce was as much related to AI euphoria as it was to that positive news. From our perspective, the figures were largely as expected and there was no cause for us to change our assumptions nor estimates. Clearly Alphabet now trades at a larger premium to our valuation, but given the conservativeness of that valuation, in our view the premium is still not so much as to warrant selling. It represents 5.3% of the Fund.”
