Artificial intelligence (AI) has been a red-hot investment theme for nearly two years, and Nvidia has been one of the most popular ways to play that theme. But the billionaire hedge fund managers below sold shares of Nvidia during the second quarter, and shifted capital toward two other AI stocks, Amazon(NASDAQ: AMZN) and Taiwan Semiconductor (NYSE: TSM).
- Ken Griffin of Citadel Advisors sold 9.2 million shares of Nvidia, slashing his stake by 79%. He also added 1.1 million Amazon shares and 633,897 Taiwan Semiconductor shares. Amazon now ranks as his largest holding excluding options and index funds.
- Philippe Laffont of Coatue Management sold 96,963 shares of Nvidia, reducing his stake by 1%. He also purchased 702,235 Amazon shares and 1.1 million Taiwan Semiconductor shares, which now rank as his second and third largest positions, respectively.
Of course, the second quarter ended on June 30, so the trades detailed above occured months ago. However, Amazon and Taiwan Semiconductor still come highly recommended by Wall Street:
- Among the 65 analysts that follow Amazon, 95% rate the stock a buy and the remaining 5% rate the stock a hold. The median price target of $220 per share implies 18% upside from its current share price of $187.
- Among the 44 analysts that follow Taiwan Semiconductor, 98% rate the stock a buy and the remaining 2% rate the stock a hold. The median price target of $209 per ADR implies 15% upside from its current price of $181.
Here's what investors should know about Amazon and Taiwan Semiconductor.
1. Amazon
Amazon operates the world's most popular online marketplace in terms of monthly visitors, and the company has fortified its leadership with a robust logistics network. Dominance in retail has helped Amazon become the third-largest ad tech company in the United States, and it could surpass second-place Meta Platforms by the end of the decade, according to eMarketer.
Beyond retail and advertising, Amazon Web Services (AWS) is the market leader in cloud infrastructure and platform services, which puts the company in a unique position where artificial intelligence (AI) is concerned. With the largest community of customers and partners among public clouds, AWS has more monetization and upsell opportunities than its rivals. And consultancy Gartner recently recognized AWS as a leader in cloud AI developer services.
Amazon reported mixed financial results in the second quarter. Revenue increased 10% to $148 billion, narrowly missing estimates. But GAAP net income increased 94% to $1.26 per share, beating expectations. The stock declined following the report, partly because sales increased more slowly than anticipated, and partly because management gave somewhat conservative guidance for the third quarter.
However, Amazon has a strong presence in three larger markets, and Wall Street expects the company's earnings to increase at 22% annually over the next three years. That makes the current valuation of 44 times earnings look relatively reasonable. Those figures give a PEG ratio of 2, which is a discount to the three-year average of 2.9. Patient investors should consider buying a few shares today.
2. Taiwan Semiconductor Manufacturing Company
Taiwan Semiconductor Manufacturing Company (TSMC) is the world's largest dedicated chipmaker or foundry. It shoulders the cost burden associated with fabricating chips for other companies. TSMC accounted for 62% of foundry revenue in the June quarter, up 4 percentage points from the previous year, according to Counterpoint Research.
That scale affords the company a significant advantage. It supports the aggressive capital expenditures required to keep TSMC on the cutting edge of semiconductor manufacturing, also called process technology. Heavy R&D spending, coupled with engineering expertise, enables the company to consistently build chips that are smaller, faster, and more power efficient.
TSMC holds more than 90% market share in its most advanced process technologies, the 3-nanometer and 5-nanometer nodes, according to analysts. And management says its 2-nanometer node will reach volume production in 2025. Industry leadership affords TSMC pricing power, and it has made the company the AI chipmaker of choice for customers like Apple, Broadcom, and Nvidia.
TSMC reported strong financial results in the second quarter. Revenue increased 32% to $20.8 billion and earnings jumped 30% to $1.48 per ADR. "Our business in the second quarter was supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by continued smartphone seasonality," said CFO Wendell Huang. He anticipates strong demand for smartphone and AI products in the third quarter.
Wall Street expects TSMC's earnings to increase at 26% annually over the next three years as the AI boom drives demand for faster semiconductors. That makes the current valuation of 32.4 times earnings look fair. Those figures give a PEG ratio of 1.2, which is a discount to the three-year average of 1.6. Investors should feel comfortable buying a few shares today. TSCM stock doubled the gains in the S&P 500 during the last three years, and I think it will continue to outperform over the next three.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Amazon, Apple, Meta Platforms, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Gartner. The Motley Fool has a disclosure policy.
