Investors have gone back and forth on the hyperscalers this year.
Billionaire investors, often running hedge funds, have sold these stocks due to concerns that returns across their AI infrastructure investments will be lackluster.
The market is quick to reverse course if hyperscalers can show that AI is boosting the financial performance of specific business segments.
Billionaire investors did not make their fortunes on luck.
Most of them have been investing for decades and have experience across many cycles, allowing them to recognize the makings of a successful investment before the rest of the market does. That's why many investors are always anxious to see what billionaires are buying and selling each quarter.
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Retail investors should never just follow billionaires. Most billionaire investors run hedge funds, which invest on much shorter time horizons. You won't find out about their trades until after they make them, often at least a few months later.
However, following billionaires and their investments can be a good way to get new ideas and test your investment thesis. In the second quarter of the year, billionaires sold six artificial intelligence stocks. Should you?
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All year, investors have been back and forth on the AI trade. Hyperscalers have committed to spending hundreds of billions of dollars on AI-related infrastructure due to what they claim is off-the-charts demand.
While one cohort of the market certainly buys the hype, another is worried that the returns on this capital investment will not be strong enough to justify it. Furthermore, they grow worried that companies once known as cash-generating machines are now generating negative free cash flow.
Investors are also cautious in general right now, believing a correction or market reset is needed after several strong years of returns. In Q2 of the year, billionaires or their funds sold six key stocks in the "Magnificent Seven," which have carried the market for several years now:
Investors should understand that no one, not even billionaire investors, knows how the AI trade will play out. Billionaires also aren't selling these solely because they don't believe in AI. It also has to do with the individual companies themselves.
For instance, in Q2, Appaloosa sold Microsoft but initiated a new position in Apple while increasing its stakes in Meta, Amazon, and Alphabet. Ultimately, I would advise investors to take a similar approach.
Don't simply sell all stocks with AI exposure. Evaluate them on a company-by-company basis. Of the six mentioned above, I would certainly stay away from Tesla, which has launched an autonomous ride-hailing fleet and intends to build humanoid robots.
The technology does not appear to be perfected, but Tesla's valuation of nearly 215 times forward earnings already assumes significant success in these business lines, which isn't guaranteed.
Of the others, while I think there is an investment case for each, Amazon and Apple are my top picks right now. While Amazon is planning for $220 billion of capital expenditures this year, the company's Amazon Web Services cloud division just posted 37% annual revenue growth, its best performance in 18 quarters.
I also think Amazon will be able to take advantage of robotics and heavily integrate the technology into its massive e-commerce business, whether by optimizing its warehouses or relying more on drones to deliver items.
I like Apple simply because it has not invested hundreds of billions in data centers, yet it can still benefit from AI by integrating the technology into its many popular consumer products.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Tesla. The Motley Fool has a disclosure policy.