We recently published a list of Billionaire Paul Singer warns about these 7 AI bubble stocks; he buys 3 tech stocks. With Amazon.com Inc (NASDAQ:AMZN) ranking number one on the list, the site deserves a closer look.
Billionaire Paul Singer Elliott Management has reportedly said in a recent letter to investors that mega-cap stocks of AI technology companies are in a “bubble” and Nvidia is “overvalued.” The fund said in its letter that it is skeptical of the idea that technology companies will continue to buy AI chips in bulk in the future, adding that AI is “overvalued and many applications are not yet ready for prime time.” It also claimed that many AI use cases “will never be cost-effective, will never work properly, will consume too much power, or will prove unreliable.” The fund reportedly said in its letter that AI is actually software that has not delivered “value commensurate with the hype.”
The $66 billion Elliott Management, founded by billionaire Paul Singer, one of the most feared activist investors in the US, said there are “few real uses” for AI other than “summarising meeting notes, producing reports and assisting with computer programming”.
Elliott Management stated in its letter that it is staying away from the “bubble stocks” of the “Magnificent Seven”.
Elliott Management posted a modest gain of 4.7 percent last year, but it hasn’t had a bad year since the 2008 financial crisis. Since its founding in 1977, the fund has only had two bad years, a feat that is hard to match in the hedge fund industry.
While Elliott calling mega-cap AI stocks a bubble is an important development, it certainly comes as no surprise. Many investors and market experts have warned about the hype surrounding large AI stocks.
Here’s what Inan Dogan, founder and head of research at Insider Monkey, said about Elliott Management’s latest thoughts on AI stocks:
“I said that NVDA’s market cap assumes the company will make around $150 billion in profits on a sustained basis, which is crazy. Elliott says the same thing and it becomes a headline! Investors don’t know how to bet on the AI revolution, so the only visible companies they think will benefit are semiconductor and cloud companies. That’s why they’ve pounced on NVDA. That doesn’t mean other tech companies are in a bubble. On the other hand, if Elliott is right that other megacaps are currently overspending on NVDA chips, that means their profits are undervalued and they are actually much more profitable and cheaper than Elliott thinks. That’s why NVDA and cloud companies are in different categories. NVDA might be in a bubble, but I’m not sure other megacaps in the Magnificient Seven group are in a bubble.”
For this article, we analyzed the top AI stocks from the Mag. 7 Group that Paul Singer says are in a bubble. We also talked about three AI/tech stocks that were in Singer’s portfolio at the end of the first quarter of this year. Why do we care about the stocks that hedge funds invest in? The reason is simple: Our research has shown that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (Further details can be found here).
Amazon.com Inc (NASDAQ:AMZN)
Number of hedge fund investors: 302
Amazon is a key part of the Mag. 7 group of stocks that Paul Singer believes may be in a bubble.
Amazon.com Inc (NASDAQ:AMZN) shares fell as investors digested the company’s latest quarterly report, in which revenue missed estimates and guidance was weak despite AWS growth.
AWS’s revenue growth accelerated from 17.2% in the first quarter to 18.8% in the second quarter, driven by a shift from on-premises infrastructure to cloud solutions and increasing demand for AI capabilities. Amazon.com Inc’s (NASDAQ:AMZN) advertising segment achieved year-over-year revenue growth of over $2 billion, indicating significant potential in video advertising and opportunities within Prime Video offerings.
As with other technology companies, fears of high capital spending are holding investors back. Amazon.com Inc (NASDAQ:AMZN) spending is expected to rise as its Project Kuiper broadband project and AI grow. Investors are still considering whether AI monetization and ROI will materialize anytime soon. Amazon.com Inc (NASDAQ:AMZN) is also facing a slowdown in consumer spending, especially on high-priced items like electronics and computers.
Based on Amazon.com Inc’s (NASDAQ:AMZN) third-quarter forecast, revenue growth would be 11%. The stock trades at 35 times Wall Street’s forecast earnings for fiscal 2025, showing that the stock is fairly valued and investors hoping for strong growth should look elsewhere.
Diamond Hill Select Strategy made the following comment on Amazon.com, Inc. (NASDAQ:AMZN) in its Investor letter Q2 2024:
“Our largest individual contributors in the second quarter included Amazon.com, Inc. (NASDAQ:AMZN), Texas Instruments and Mr. Cooper Group. Internet retail and cloud infrastructure company Amazon is benefiting from strong profitability, particularly in its Amazon Web Services (AWS) business. Shares also received a boost from growing optimism about demand for AWS as Amazon customers’ investments in generative AI projects continue to rise.”
Overall, Amazon.com Inc (NASDAQ:AMZN) ranks first on Insider Monkey’s list of the titled Billionaire Paul Singer warns about these 7 AI bubble stocks; he buys 3 tech stocks. While we recognize the potential of Amazon.com Inc (NASDAQ:AMZN), we believe AI stocks promise higher returns and do so in a shorter period of time. If you’re looking for an AI stock that’s more promising than AMZN but worth less than five times its earnings, read our report on the cheapest AI stock.
READ MORE: Analyst sees a new $25 billion “opportunity” for NVIDIA And Jim Cramer recommends these stocks.
Disclosure: None. This article was originally published on Insider Monkey.
