There’s arguably no bigger buzz phrase on Wall Street right now than “artificial intelligence.” AI, as it’s more commonly abbreviated, describes the use of software and systems that handle tasks usually overseen by humans. The game-changer is the machine-learning capacity of AI, which allows software and systems to grow smarter and more efficient over time.

The lure of AI is its global breadth. It’s a tool that virtually every sector and industry can use to improve productivity and/or encourage consumption. According to a report from PwC, the global economic impact of AI in 2030 is expected to be $15.7 trillion. That’s a big number, and everyday investors haven’t been shy about not wanting to miss this next-big-thing opportunity.

But it’s not just retail investors who are onboard with AI euphoria. Based on the latest round of Form 13F filings with the Securities and Exchange Commission, billionaire investors have been intrigued by the potential of artificial intelligence. A 13F is a quarterly filing that allows investors to see what Wall Street’s brightest money managers bought and sold in the latest quarter.

All told, billionaire investors bought two ultra-popular AI stocks hand over fist during the quarter, while shying away from another exceptionally popular AI holding.

Popular AI stock No. 1 that billionaires are buying hand over fist: Nvidia
The first artificial intelligence stock that some of Wall Street’s billionaire investors can’t seem to get enough of is semiconductor company Nvidia (NVDA).

First quarter 13Fs show that billionaires Israel Englander of Millennium Management, Ken Griffin of Citadel Advisors, and Steven Cohen of Point72 Asset Management, were big buyers. In this order, Englander, Griffin, and Cohen oversaw the addition of approximately 1.34 million shares, 1.05 million shares, and nearly 981,000 shares of Nvidia stock for their respective funds.

Although Nvidia is working on AI software solutions, such as virtual chatbots that can respond to customer inquiries for businesses, the bulk of the company’s AI ties have to do with its AI-driven graphics processing units (GPUs).

Whereas Nvidia’s GPU’s have been improving the personal-computing gaming experience for decades, it’s the company’s A100 GPUs that are set to become its next major growth driver. The company’s GPUs are being used in data centers to expedite the data-processing and allow AI software and systems to make split-second decisions. Nvidia’s GPUs are, effectively, being viewed as the infrastructure foundation from which AI can thrive – and the company’s year-to-date stock performance proves it.

However, even the hottest companies on the planet will face challenges. For instance, Nvidia was coerced to develop the A800 GPU for its Chinese consumers after export restrictions were placed on the high-powered, AI-inspired A100 and H100 GPUs. China represents a notable percentage of Nvidia’s net revenue. Though sales of the A800 have been strong thus far, competition in China has also been limited. When that competition builds, it’s not clear if the scaled back A800 will hold up in this key market.

Likewise, Nvidia has historically generated a substantial percentage of profits from its gaming segment. Unfortunately, gaming revenue has fallen off considerably with the worst of the COVID-19 pandemic now over. While AI-driven euphoria seems to be more than making up for lost sales tied to gaming, weakness in this consistently high-margin operating segment shouldn’t be ignored.

Popular AI stock No. 2 that billionaires are buying hand over fist: CrowdStrike Holdings
The second ultra-popular AI stock that billionaire investors can’t stop buying is cybersecurity company CrowdStrike Holdings (CRWD).

Similar to Nvidia, there were three well-known billionaires who added to their positions during the first quarter. This includes Jim Simons of Renaissance Technologies, Philippe Laffont of Coatue Management, and, once again, Ken Griffin of Citadel Advisors. Staying in this order, Simons, Laffont, and Griffin oversaw the purchase of roughly 1.3 million shares, 934,100 shares, and 223,600 shares of CrowdStrike stock.

CrowdStrike’s artificial intelligence ties come from Falcon, its cloud-native security platform. Falcon leans on AI and machine-learning to grow smarter and more effective at recognizing and responding to potential end-user threats over time. Each week, Falcon oversees trillions of events, which continually adds to its database of knowledge.

There are three standout factors that have made CrowdStrike such a popular stock for billionaires to own. To begin with, cybersecurity is practically a necessity service for businesses with an online or cloud-based presence. No matter how poorly the stock market or economy perform, there’s always a need to protect sensitive information from robots and hackers.

Another reason CrowdStrike has been nothing short of unstoppable is its high gross retention rate. Despite its software-as-a-service (SaaS) solutions costing more than some of its competitors, CrowdStrike’s ever-growing subscriber base has stuck with the company. Gross retention has climbed from less than 94% to 98% over the past six fiscal years (CrowdStrike’s fiscal year ends January 31).

The third and final factor that draws billionaires to CrowdStrike is the company’s ability to encourage existing clients to spend more. While subscriber growth has been impressive, the real eye-popper is having 62% of more than 23,000 current clients buying five or more cloud-module subscriptions. Add-on sales are pumping up the company’s adjusted subscription gross margin and allowing earnings growth to outpace its stellar sales growth.

The widely held AI stock that billionaire investors are selling: Tesla
However, not all AI stocks entranced billionaire investors during the first quarter. Despite trillions of dollars in long-term growth potential, five billionaire investors ran for the exit when it comes to widely held electric-vehicle (EV) manufacturer Tesla (TSLA).

The billionaire sellers of Tesla during the first quarter include Jeff Yass of Susquehanna International, Ken Griffin of Citadel Advisors, John Overdeck and David Siegel of Two Sigma Investments, and Steven Cohen of Point72 Asset Management. Keeping this order intact, these billionaires respectively sold approximately 9.29 million shares, 7.09 million shares, 1.47 million shares, and 877,800 shares of Tesla stock.

Tesla’s AI chops derive from its technology-driven EVs. The company’s Level 2 full self-driving (FSD) software and AI-focused FSD chips utilize sensors and vision cameras to make split-second decisions and avoid obstacles, which can range from other cars and bicycles to pedestrians. Though Tesla’s driving technology doesn’t allow for full autonomy, data is continuously being collected to (hopefully) support added layers of autonomy down the road.

While Tesla is an innovator in the respect that it’s the first auto company in more than a half-century to successfully build itself from scratch to mass production, it’s also a company with a long list of potential issues that it’ll need to address.

As an example, Tesla has reduced prices for its EVs in the U.S. on six separate occasions since the year began. While optimists had hoped that these price reductions were reflective of production efficiencies and/or a market-share grab, Tesla CEO Elon Musk put this rumor to bed during his company’s conference call and noted that price cuts are entirely tied to demand. With inventory levels building rapidly, even with aggressive price reductions, Tesla’s automotive margin could find itself under big-time pressure in the coming quarters.

The other notable concern is none other than Elon Musk. Tesla’s chief has drawn the attention of securities regulators on more than one occasion. Worse yet, Musk has continually overpromised and underdelivered when it comes to new innovations.

With EV competition picking up and Tesla struggling to generate a profit outside of selling and leasing EVs, the company’s valuation may come under pressure.

— Sean Williams

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Source: The Motley Fool