These companies are powerhouses in AI technology.
The transformative potential of artificial intelligence (AI) has led to billionaire investors scooping up a number of AI-focused tech stocks, most notably Nvidia (NVDA 1.25%).
A Motley Fool analysis of the top tech holdings in 16 billionaire-run hedge funds found Nvidia shares in 10 of them. But Nvidia wasn’t the most widely owned AI stock.
That distinction goes to shares of Google’s parent, Alphabet (GOOGL 0.36%) (GOOG 0.41%), which is held by nearly 70% of the firms. And Microsoft (MSFT 0.62%) is another top AI stock, owned by 10 of the hedge funds.
Does it make sense to emulate these billionaire investors, and buy shares in Alphabet, Microsoft, and Nvidia? Here’s a look at each company to help answer that question.
1. Alphabet
Alphabet is the top tech holding among these billionaire investors for many reasons. The company owns several successful services, such as its Google search engine, which generated $46.2 billion of Alphabet’s $80.5 billion in first-quarter revenue through the digital advertising on its site.
Alphabet’s YouTube, the second-most-visited website in the world behind Google, pulled in $8.1 billion in first-quarter advertising sales. And Google Cloud is the third-largest global cloud computing provider with $9.6 billion in first-quarter revenue.
Now, Alphabet is using AI to improve its services. Google’s search results are enhanced by AI, videos uploaded to YouTube are scanned by AI for policy compliance, and Google Cloud is a distribution platform for customers to use Alphabet’s AI technology in their own businesses.
These AI enhancements helped Alphabet’s first-quarter revenue to increase 15% year over year. The company also generated $16.8 billion in free cash flow (FCF) during the quarter. Its substantial FCF enabled it to reward investors with a dividend this year.
2. Microsoft
Microsoft is not far behind Alphabet as a popular AI stock among billionaire-run hedge funds. This makes sense since Microsoft is one of the major players in AI.
The company invested billions of dollars into OpenAI, the business behind high-profile chatbot ChatGPT, which contributed to the current interest in AI.
Microsoft infused many of its offerings with AI capabilities. For example, AI is in its ubiquitous Office software, helping customers to write emails, create presentations, and perform data analysis in spreadsheets.
AI is also benefiting the company’s Azure cloud computing platform. OpenAI uses Azure to deliver ChatGPT to customers.
Microsoft’s cloud business accounted for $35.1 billion of its $61.9 billion in revenue during the company’s fiscal third quarter, which ended March 31. This represented sales growth of 23% year over year.
Its cloud strength enabled Microsoft to produce $21 billion in FCF during the third quarter, an 18% year-over-year increase. The tech titan is using its impressive FCF to invest in the future of AI through the development of quantum computing.
3. Nvidia
Nvidia saw business boom over the past year thanks to the popularity of its AI chips. For example, in its fiscal first quarter, ended April 28, revenue was $26 billion, up 262% from the prior year.
Given its outsize business performance, it’s no wonder Nvidia is among the top tech holdings of these billionaire investors. And it has paid off handsomely. The stock price skyrocketed from a 52-week low of $373.56 last June to reach a high of $1,158.19 on May 30.
Since the stock is not far from its high at the time of this writing, does it make sense to buy shares? Yes, for several reasons.
The company’s graphics processing units (GPUs), which run AI systems, are continually getting better. This will help to maintain customer demand.
For instance, Nvidia’s latest GPU for cloud computing data centers, the H200, is said to be 100 times faster than the previous generation. Speed is essential for AI systems to perform tasks in a reasonable time.
And Nvidia recently released its Blackwell GPU to bring AI capabilities to all types of computers. According to chief financial officer Colette Kress, “Demand for H200 and Blackwell is well ahead of supply, and we expect demand may exceed supply well into next year.”
This demand has led to strong financials. Along with its triple-digit revenue growth, the company’s fiscal first-quarter net income rose to nearly $15 million versus $2 million in 2023. Its FCF jumped to $14.9 million in the first quarter from $2.6 million last year.
Nvidia’s financial performance over the past year led to phenomenal growth in its diluted earnings per share (EPS). The company’s EPS over the trailing 12 months (TTM) now exceeds rivals, such as AMD and Intel, by a wide margin.
Data by YCharts.
Moreover, the consensus among Wall Street analysts is a buy rating for Nvidia stock with a median price target of $1,200, indicating a belief in upside.
With a 10-for-1 stock split coming at the close of trading on June 7, reasons abound to echo billionaire investors and buy shares in Nvidia. And that goes for its fellow AI stocks Microsoft and Alphabet as well.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Robert Izquierdo has positions in Advanced Micro Devices, Alphabet, Intel, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.