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Billionaire Fund Managers Raise Red Flags on AI Stocks: Must-Read Warnings for Investors

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Is the AI Boom on Wall Street Sustainable? A Closer Look at Investor Sentiment

The bulls have dominated Wall Street for over two years. In 2022, the iconic Dow Jones Industrial Average, benchmark S&P 500, and innovation-driven Nasdaq Composite posted gains of 13%, 23%, and 29%, respectively, achieving multiple record-closing highs.

Numerous factors contribute to this persistent rally, including strong corporate earnings, aggressive share buybacks by industry leaders, Donald Trump’s November election victory, a resilient U.S. economy, and stock-split excitement.

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Among these factors, the artificial intelligence (AI) revolution stands out as a primary driver of investor enthusiasm.

A New York Stock Exchange floor trader looking up in worry at a computer monitor.

Image source: Getty Images.

The Vast Potential of AI: A $16 Trillion Market

Investors are particularly excited about AI due to its impressive potential across various sectors. AI-enhanced software can improve tasks and acquire new skills without human help. This capability renders AI useful in almost every global industry.

According to analysts at PwC in their report Sizing the Prize, AI could add $15.7 trillion to the global economy by 2030, translating to a remarkable 26% increase in global GDP as a result of productivity enhancements and consumption effects.

Nvidia (NASDAQ: NVDA) has emerged as a leader in this field. Its graphics processing units (GPUs) are essential for high-performance data centers. The company’s Hopper (H100) chip and the next-generation Blackwell GPU architecture enable AI software to make quick decisions, supporting businesses in developing large language models and running generative AI applications.

Meanwhile, companies like Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), and Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) are also generating excitement over AI. These three firms dominate the cloud services market, and they are increasingly integrating generative AI solutions to assist their clients.

Wall Street’s Billionaire Investors Voice Caution

However, some of Wall Street’s top billionaire investors are expressing concerns about AI stocks. Recent Form 13F filings with the Securities and Exchange Commission reveal which stocks prominent investors are buying and selling. These filings are required within 45 days after the end of each quarter for institutional investors managing at least $100 million in assets.

The latest filings indicate that five billionaire asset managers were sellers of leading AI stocks (with total shares sold in parentheses):

  • Dan Loeb of Third Point: Alphabet, Class A (GOOGL)(1,980,000 shares), Amazon (1,400,000 shares), Apple (NASDAQ: AAPL)(1,020,000 shares), Microsoft (710,000 shares), and Meta Platforms (NASDAQ: META)(555,000 shares)
  • Warren Buffett of Berkshire Hathaway: Apple (100,000,000 shares)
  • Terry Smith of Fundsmith: Microsoft (240,340 shares)
  • Stanley Druckenmiller of Duquesne Family Office: Microsoft (357,395 shares), Nvidia (214,060 shares), and Apple (24,400 shares)
  • Philippe Laffont of Coatue Management: Nvidia (3,616,286 shares) and Meta Platforms (488,068 shares)

This selling trend may be attributed to two main concerns.

A visibly concerned investor looking at a rapidly rising then plunging stock chart displayed on a tablet.

Image source: Getty Images.

Historical Trends and AI’s Challenges

One significant challenge facing AI is its historical precedents. Recent innovations claiming to be the next big thing often face hurdles. Take the internet, for example. Its potential wasn’t fully realized until years after the dot-com bubble burst.

Since then, several promising innovations like genome decoding, nanotechnology, and blockchain technology have experienced similar cycles of initial hype followed by setbacks.

This isn’t to say that AI doesn’t have a bright future. Many industries stand to benefit from this technology. However, many businesses are still figuring out how to effectively implement AI for a positive return on investment.

Generally speaking, emerging technologies require time to develop, and it’s likely AI will be no different. If history holds true and an AI bubble bursts, the current selling trend by billionaire investors may prove to be far-sighted.

Investors Notice the Market’s Elevated Valuations

Another reason billionaire investors are selling off AI stocks could be the historically high prices in the market. As of January 17, the S&P 500’s Shiller price-to-earnings (P/E) ratio, known as the cyclically adjusted P/E ratio (CAPE), was at 38.11. This number reflects average inflation-adjusted earnings over the past decade and marks the third-highest level within a continuous bull market lasting 154 years.

Market Warning Signs: Historical Context of High Shiller P/E Ratios

Historic Trends Show Caution for AI Stocks

Since January 1871, the S&P 500’s Shiller P/E ratio has exceeded 30 only six times during bull markets. In five of those instances, the Dow, S&P 500, or Nasdaq Composite experienced declines of 20% or more.

Currently, many leading AI stocks are pushing their valuations to new heights. Companies like Alphabet and Meta Platforms remain fundamentally sound, while others may struggle to justify their high prices without perfect conditions.

A notable example is Nvidia, where the price-to-sales (P/S) ratio exceeded 40 last summer, reminiscent of market leaders in the dot-com boom, like Amazon, which saw significant value losses after hitting similar ratios.

Moreover, Apple’s trailing-12-month P/E ratio recently soared above 42, marking the highest level in over 15 years. This valuation seems particularly steep for a company facing stagnant physical device sales, including iPhone sales, for the past two years.

With this historical context and current valuations, prominent investors are expressing concern that leading AI stocks might face challenges in the upcoming year.

Investment Alert: Don’t Miss a Potential Opportunity

Have you ever regretted missing out on top-performing stocks? If so, you’ll want to pay attention to this announcement.

Rarely, our team of analysts issues a “Double Down” stock recommendation for companies they believe are poised for growth. If you think you’ve missed out, now could be a key moment to invest before opportunities diminish. The following figures illustrate past performance:

  • Nvidia: A $1,000 investment when we doubled down in 2009 would now be worth $357,084!*
  • Apple: If you invested $1,000 in 2008, it would have grown to $43,554!*
  • Netflix: A $1,000 investment from 2004 would now be valued at $462,766!*

We are currently issuing “Double Down” alerts for three outstanding companies, and this may be one of the last chances to invest at a favorable time.

Learn more »

*Stock Advisor returns as of January 21, 2025

Suzanne Frey, an executive at Alphabet, is on The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, now an Amazon subsidiary, is also a member of The Motley Fool’s board. Randi Zuckerberg, a former director at Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is on the board as well. Sean Williams holds positions in Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Meta Platforms, Microsoft, and Nvidia. The Motley Fool suggests options positions for Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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