In this article, we will take a detailed look at Top 10 Favorite AI Stocks of Brad Gerstner.
Brad Gerstner, the founder of Altimeter Capital, has been a major believer in AI and tech stocks in general. Recently, the 53-year-old hedge fund manager shared some interesting data points highlighting the importance of tech stocks during an interview with Scott Galloway’s YouTube channel.
“Since 2014 technology earnings have compounded at 16% and technology stocks have compounded at 18%. Non-tech earnings have compounded at about 4% and stocks at about 6%. So if you look at the long run of technology since 2005 it’s gone from 5% of global GDP to 15% of global GDP,” Gerstner said.
Gerstner, whose firm manages about $10 billion in assets, emphasized during the interview that the risk of not investing in AI is higher than the risk of investing. He was addressing the market concerns about ROI on AI spending.
“As a professional investor, we’re just trying to determine what level of asymmetry what level of enthusiasm or exuberance is baked into these stocks and what are we seeing day to day in terms of usage and revenues out of the consumer,” he said.
For this article we scanned Altimeter Capital’s Q2 portfolio and discussed its biggest AI stock picks. 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).
Brad Gerstner of Altimeter Capital
10. Apple Inc (NASDAQ:AAPL)
Brad Gerstner’s Stake: $57,155,950
Talking to CNBC in June, Brad Gerstner said:
“Clearly, Apple with a billion users is going to play a significant role in introducing AI to the masses. And part of the reason we like Apple is only 5% of Apple users today can access Apple Intelligence so they are going to have to upgrade these devices in order to play.”
However, initial numbers on Apple’s new iPhone are not encouraging. Shipments for Apple Inc (NASDAQ:AAPL) latest iPhone 16 appear to be lower than last year, according to data from UBS Evidence Lab. The lab tracks iPhone availability across 30 regions, and UBS analyst David Vogt noted that delivery wait times for the iPhone 16 Pro Max models are about two weeks shorter than last year in major markets like the U.S., China, and Europe.
“Wait times for the iPhone 16 lineup have been uninspiring since preorders began last Friday,” said UBS analyst David Vogt, in an investor note. “On average, delivery wait times for the Pro Max models are shorter by roughly 2 weeks across the US, China, Germany, Great Britain, France and Japan.”
In the U.S., wait times are 26 days, down from 40 days last year, while in China, they’re just 18 days compared to 36. Despite the upcoming Apple Inc (NASDAQ:AAPL) Intelligence features, initial pre-order sales for the iPhone 16 series are estimated at 37 million units, down 12.7% year-over-year.
Almost every bullish case on Apple Inc (NASDAQ:AAPL) is built around this assumption: millions of people would rush to upgrade their iPhone because of AI features.
However, Apple Inc (NASDAQ:AAPL) has been seeing a long-term decline in mobile carrier upgrade rates, especially postpaid, for several years. This suggests that people are holding onto their devices longer, likely due to economic factors, satisfaction with current technology, or a lack of exciting new features in recent models. This trend isn’t great for Apple Inc (NASDAQ:AAPL). Can Apple Intelligence break this trend? We’ll find out soon.
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.
Baron Technology Fund stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q2 2024 investor letter:
“The Fund’s chief relative detractor was Apple Inc. (NASDAQ:AAPL), even though it was a meaningful contributor to absolute performance, as we added to our Apple position significantly during the period. We bought Apple well, but
in 20/20 hindsight we didn’t buy enough. Because Apple has an oversized weight in the Benchmark (its average weight was 15.7% for the period), when Apple’s stock outperforms (it appreciated 23.0%), it has generally been a headwind to relative performance. Our Apple underweight accounted for 33% of our relative underperformance for the period.
This quarter we increased the size of our position in Apple Inc., a leading technology company known for its innovative consumer electronics products like the iPhone, MacBook, iPad, and Apple Watch. Apple is a leader across its categories and geographies, with a growing installed base that now exceeds 2 billion devices globally. The company’s attached services – including the App Store, iCloud, Apple TV+, Apple Music, and Apple Pay – provide a higher margin, recurring revenue stream that both enhances the value proposition for its hardware products and improves the financial profile. Apple now has well over 1 billion subscribers paying for these services, more than double the number it had just 4 years ago. The increasing services mix has led to healthy operating margin improvement, providing more free cash flow for Apple to reinvest in the business and to distribute to shareholders. Throughout its 48-year history, Apple has successfully navigated and capitalized on major technological shifts, from PCs to mobile to cloud computing. We believe the company’s leading brand and device ecosystem position it to do equally well in the AI age, and this was the driver of our decision to re-invest. “Apple Intelligence” – the AI strategy unveiled at Apple’s recent Worldwide Developer Conference – leverages on-device AI and integrations with tools like ChatGPT to enhance user experiences across its ecosystem. The AI suite enables users to create new images, summarize and generate text, and use Siri to perform actions across their mobile applications, all while maintaining user privacy and security. We think Apple Intelligence can drive accelerated product upgrade cycles and higher demand for Apple services. The combination of growth re-acceleration, increasing services contribution, and thoughtful capital allocation should continue driving long-term shareholder value.”
9. Dell Technologies Inc (NYSE:DELL)
Brad Gerstner’s Stake: $68,119,266
Amit Daryanani, Evercore ISI senior managing director, said in a latest interview with CNBC that he’d want to own Dell Technologies Inc (NYSE:DELL) shares on the back of an expected PC upgrade cycle in 2025.
Bill Baruch, founder and president at Blue Line Capital, said in an interview with CNBC that there were margin concerns in the previous quarter report but in the latest results we saw “significant” margin improvement in the infrastructure solutions group which holds the AI server subsegment. This subsegment saw about 80% year-over-year growth.
“This was a great report. It’s everything we wanted to see.”
The analyst said that the stock could reach $134 by the end of this year.
Dell Technologies Inc (NYSE:DELL) got attention when Elon Musk said on Twitter that the company, along with Super Micro Computer, would make servers for his AI startup xAI. But Dell is expanding its partnerships with other companies, too. In just a few quarters, AI servers have surged to account for 12.4% of total revenue, up from 2.2% three quarters ago. Dell Technologies Inc (NYSE:DELL) closed the quarter with a record $3.8 billion backlog, which is impressive. In May 2024, Dell expanded their AI factory with Nvidia to include the new PowerEdge XE9680L server, as well as storage, edge, and workstation solutions.
Carillon Scout Mid Cap Fund stated the following regarding Dell Technologies Inc. (NYSE:DELL) in its Q2 2024 investor letter:
“Dell Technologies Inc. (NYSE:DELL) was a top contributor despite reporting disappointing first-quarter earnings results, because investors looked through the near-term disappointment and expected strong growth from AI-related servers and personal computers. We expect Dell to participate in the growth of artificial intelligence hardware, especially as enterprises invest more aggressively. We like the company’s depth and breadth of products and services, as well as its focus on keeping costs low.”
8. Salesforce Inc (NYSE:CRM)
Brad Gerstner’s Stake: $93,478,989
Salesforce Inc (NYSE:CRM) is trending after beating second-quarter estimates and raising its full-year profit guidance to $10.03 to $10.11 per share from $9.86 to $9.94 per share.
In the second quarter, Salesforce’s revenue rose 8% year over year while gross profits jumped 10%.
Salesforce Inc (NYSE:CRM) is also on investors’ radar because of its acquisitions. The company recently agreed to acquire AI voice agent firm Tenyx. This acquisition follows Salesforce’s strategic partnership with Workday to develop an AI-powered assistant for employees. The company has also agreed to buy SaaS data protection startup Own for $1.9 billion in cash.
Wall Street expects $11.12 per share in profits for Salesforce Inc (NYSE:CRM) next year, representing a 10% year-over-year increase. For the current financial year, profits are expected to grow by 23%, with estimates trending upwards. Based on these forecasts, Salesforce trades at a forward price-to-earnings ratio of 22, which is attractive given the AI-related growth catalysts.
Ithaka US Growth Strategy stated the following regarding Salesforce, Inc. (NYSE:CRM) in its Q2 2024 investor letter:
“Salesforce, Inc. (NYSE:CRM) is the largest pure-play cloud software company, holding a leading market share in customer relationship management applications and a top-five market share position in the company’s other clouds (Marketing, Service, Platform, Analytics, Integration, and Commerce). The company’s software subscription term-license model differs from the traditional perpetual-license software model in two respects: (1) the software is hosted on centralized servers and delivered over the internet, as opposed to traditional enterprise software that is loaded directly onto customers’ hard drives or servers; and (2) the revenue model is subscription-based, typically charging monthly fees per user as opposed to charging one-time licensing fees. The stock’s weak relative performance followed its fiscal first quarter earnings announcement, where the company missed top-line and cRPO (current remaining performance obligations) estimates while also issuing weak forward guidance.”
7. Alphabet Inc (NASDAQ:GOOG)
Brad Gerstner’s Stake: $122,865,640
When ChatGPT started making waves, Brad Gerstner became one of the top voices calling the AI revolution a threat to Google’s search business. However, he has grown bullish on the company over the past few months. Talking about this change during a program on CNBC, the investor said he still believes the future of search is not “ten blue links” but praised the company’s efforts to change.
“They have got to tighten the belts and get ready for this battle because this is a different battle than the one they’ve been fighting for the last decade. They were dominant in ten blue links. They are not dominant in this. There are a lot of other players in the age of AI,” he said.
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. According to StatCounter report, Bing search engine’s market share only increased from 3.03% in August 2023 to 3.91% in August 2024. This shows MSFT has not been able to make any notable dent in Google’s market share.
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.
Baron Fifth Avenue Growth Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q2 2024 investor letter:
“We also added to Alphabet Inc. (NASDAQ:GOOG). The company reported solid financial results with first quarter revenue growth of 15% year-over-year, driven by 14% growth in search, 21% growth in YouTube, and 28% growth in cloud (which accelerated from 26% growth in the fourth quarter). The company has also increased its cost discipline efforts, which drove operating margins to 31.6% (compared to 25% in the first quarter of 2023). With regards to GenAI, while we are cognizant of the potential risks to the dominance of search, we believe that on the range of outcomes, Alphabet remains well positioned through its massive user distribution (9 products with over 1 billion users each), long-standing AI research labs (DeepMind and Google Brain), top AI talent, a solid cloud computing division in Google Cloud, and deep pockets for investing in AI. During the quarter, Alphabet also held its annual I/O conference, where it provided an update on its efforts in AI including: Gemini is now used by 1.5 million developers; model quality is expanding rapidly (e.g., context window is now 2 million tokens of length); the new genomics model, Alphafold 3 can predict structures of molecules and potentially accelerate drug discovery; new TPU6 AI chips has shown a 4.7 times improvement in compute performance compared to the prior generation; and Gemini for workspace is showing early data on a 30% increase in user productivity. Alphabet also has real value in assets such as Waymo, which are not factored into valuation today (and are potentially included at a negative valuation as they currently generate losses, hurting EPS). We continue to believe that the current valuation of Alphabet presents an attractive risk/reward for long-term owners of the business and have therefore increased our position.”
6. Amazon.com Inc (NASDAQ:AMZN)
Brad Gerstner’s Stake: $277,184,273
Amazon is also among the top AI picks of Altimeter. Brad likes AMZN because of its e-commerce business.
Cantor Fitzgerlad recently initiated coverage of Amazon.com Inc (NASDAQ:AMZN) with an Overweight rating and said in a broader industry note that despite strong performance, many tech stocks remain attractively valued.
“Despite strong performance over the last 18 months, valuations in internet names are fairly reasonable and should benefit from the expectation for upcoming rate cuts, tempered by decelerating top-line growth and as benefits from widespread cost-cutting fade,” Cantor said.
AWS’s revenue growth accelerated from 17.2% in Q1 to 18.8% in Q2, driven by a shift from on-premises infrastructure to cloud solutions and increasing demand for AI capabilities. Amazon.com Inc (NASDAQ:AMZN) advertising segment added over $2 billion in revenue year-over-year, indicating significant potential in video advertising and opportunities within Prime Video offerings.
Like other tech companies, fears stemming from high CapEX are keeping investors on the sidelines. Amazon.com Inc (NASDAQ:AMZN) spending is expected to rise amid broadband project Project Kuiper and AI growth. Investors are still figuring out whether AI monetization and ROI will come anytime soon. Amazon.com Inc (NASDAQ:AMZN) is also facing a slowdown in consumer spending, especially for higher-ticket items like electronics and computers.
Based on Amazon.com Inc (NASDAQ:AMZN) Q3 guidance, its revenue growth would be 11%. The stock is trading 35x its fiscal 2025 earnings estimates set by Wall Street. This shows the stock is fairly priced and investors looking for strong growth could look elsewhere.
Hayden Capital stated the following regarding Amazon.com, Inc. (NASDAQ:AMZN) in its Q2 2024 investor letter:
“Our portfolio is still recovering from the 2022 downturn, although we’ve made meaningful progress in the last two years. While that experience has taught us many lessons, that dislocation also provided a rich vein of opportunities that we continue to mine today
Some of our biggest winners in the last two years, have been “re-acceleration” stories. These are cases where once rapidly growing companies suddenly put the brakes on during a weak economy. There could be several reasons for this – customers pulling back during a recession, the company proactively curtailing growth spend as a precaution, needing to cut costs & right-size the business to become profitable quickly, or many other reasons.
But the commonality seems to be that as soon as growth stops, the market narrative turns suddenly from positive, to “this company is finished”. They go from being valued for many years of rapid growth, to being priced like a mature company that will never realize significant growth again. But often neither scenario is true, with the ultimate future path somewhere in between.
I find the fact this type of opportunity even exists, fascinating. Especially since it seems to happen every bear-market – perhaps indicating it’s embedded in human nature (and thus persistent & likely minable throughout one’s investing career). For example, I gave the examples of Amazon.com, Inc.’s (NASDAQ:AMZN) stock performance in our Q1 2022 letter (please re-read this piece for more context; LINK)…” (Click here to read the full text)
5. Confluent Inc (NASDAQ:CFLT)
Brad Gerstner’s Stake: $380,613,883
Data streaming platform company Confluent is an important AI stock Altimeter is buying. The company talked about the positive impact of AI on its business during Q2 earnings call:
“A wide range of use cases have already been established through the Build with Confluent program, including a GenAI bot for airline customer support, fraud detection against AI-powered voice phishing, automated limit increases for credit card users, and real-time telemetry analysis for freight optimization. We’re also seeing great traction with Connect with Confluent, a technology partner program that makes it easier for partners to build data integrations with Confluent Cloud. In Q2, we crossed more than 40 technology partner-built integrations, including SAP, MongoDB, [Inaudible], and services at Google Cloud and AWS, giving us coverage across the major segments of the modern data and AI stack to help us drive consumption of Confluent. The success of Connect with Confluent has tripled the amount of data traffic from our partner integration since the start of the year.”
Confluent’s data streaming platform is based on Apache Kafka, a popular open-source streaming technology, and they’ve recently expanded by adding a version built on Apache Flink.
With the increasing demand for real-time data analysis, particularly in generative AI, Confluent has seen fast growth in both customer numbers and revenue. In Q2 2024, revenue rose 24% year-over-year, from $189.3 million to $235 million. Subscription revenue, which increased by 27% from $176.5 million to $224.7 million, was a key factor behind this growth. This revenue jump also improved their gross margin, up from 69.4% to 72.35%.
The company expects subscription revenue between $233 and $234 million for Q3 and aims for $910 million in subscription revenue for the full year. Total revenue is projected to hit around $950 million, including $40 million from services. Confluent is also guiding adjusted EPS at $0.05 for Q3 and $0.20 for the full year.
Historically, Confluent charged customers a mix of fixed subscription fees and usage-based pricing. But they are shifting towards a consumption model, where customers pay only for what they use. According to management, this transition is nearly complete. This new model is expected to drive higher demand by offering more flexibility and scalability for customers as their data needs grow. It may also attract new customers who were previously hesitant due to fixed subscription costs.
