Billionaire Philippe Laffont Trimmed 8 of His Fund's Top 10 Positions Last Quarter. Here's What the Other 2 Have in Common.

Philippe Laffont is one of the smartest growth-stock investors in the market. His hedge fund Coatue Management oversees a $33 billion public equity portfolio with even more capital held in private companies.

Laffont often shifts his portfolio in response to macro factors, and last quarter saw a significant tilt. He sold off shares in eight of the fund's 10 largest positions while adding to just two of them.

There's a very notable commonality between the two positions Laffont added to last quarter. It's also echoed in a couple of other portfolio additions.

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Investing in the foundation of AI infrastructure

At the start of the year, Laffont's top 10 holdings were as follows:

1. Taiwan Semiconductor Manufacturing (NYSE: TSM)
2. Microsoft
3. Meta Platforms
4. Amazon
5. GE Vernova
6. Alphabet
7. Constellation Energy
8. Broadcom
9. Nvidia
10. Lam Research (NASDAQ: LRCX)

The only two on the list he added to were Taiwan Semiconductor (TSMC) and Lam Research. TSMC is the largest contract semiconductor manufacturer in the world, and Lam Research is a leading supplier of wafer fabrication equipment. The trading activity at Coatue shows a clear preference to invest further up the AI computing supply chain.

The huge spending by hyperscalers like Microsoft, Meta Platforms, Amazon, and Alphabet is transferring significant cash flow from cloud computing companies to manufacturing companies. That creates significant uncertainty for the cloud computing giants betting on the future, but it creates a tremendous opportunity for companies like TSMC and Lam Research. They've been able to raise pricing as demand soars.

The same is true of two new additions to Coatue's portfolio last quarter: ASML Holding and Micron Technology.

Microsoft recently shared expectations that its capital expenditures (capex) will climb to $190 billion for the calendar year, with a marked acceleration in the second half. The other hyperscalers have also shared growing budgets in capex. Laffont expects budgets to keep growing year after year as a result of AI innovations such as agentic capabilities. That could keep their earnings multiples lower for an extended period.

Meanwhile, companies like TSMC and Lam Research are seeing excellent revenue growth and margin expansion while generating substantial free cash flow.

It's worth noting that Coatue also sold chipmakers such as Nvidia and Broadcom. These companies are stuck between the manufacturers and the hyperscalers. Both are reliant on TSMC to manufacture their chips, as its leading-edge technology and scale make them the only viable partner to meet the demands of their hyperscaler customers.

That puts TSMC in the driver's seat as it controls its capex budget and pricing. TSMC's equipment suppliers will benefit as well, as TSMC can pass costs on to the rest of the supply chain, as their demand is practically insatiable.

Should you follow the billionaire's lead?

While it's one thing to be in a strategically strong position as a business, it's another for your stock to offer good value for investors. To that end, Laffont's top holdings offer a mixed bag.

Shares of Lam Research are up nearly 60% so far this year. Despite strong earnings results and a better-than-expected outlook in April, the stock barely budged, indicating the market is already pricing in stellar results. That's evidenced by the climb in its forward price-to-earnings ratio (P/E) from around 30 at the start of the year to 48 today.

While it should exhibit strong earnings growth over the next couple of years as demand for all sorts of AI chips remains high, it's still a hefty premium to pay. It wouldn't be a surprise to see Laffont take some profits on the stock this quarter.

Meanwhile, TSMC has also seen its P/E climb significantly over the last four-and-a-half months. But even with the market-beating returns it's produced so far this year, its P/E still sits at an attractive 25.

That's in line with Microsoft and Nvidia, and around where the other hyperscalers trade despite the much more positive medium-term outlook in TSMC's business. That makes it a very attractive stock and deserving of Coatue's top position in the portfolio.

Adam Levy has positions in Alphabet, Amazon, Meta Platforms, Microsoft, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Alphabet, Amazon, Broadcom, Constellation Energy, GE Vernova, Lam Research, Meta Platforms, Micron Technology, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.