Successful hedge fund manager David Tepper is betting big on Amazon, Microsoft, and Nvidia.
David Tepper’s Appaloosa is the 12th most profitable hedge fund in history as measured by net gains since inception. The hedge fund returned 58% during the three-year period that ended in March 2024, while the S&P 500 (^GSPC 0.77%) returned just 32% during the same period. That makes Tepper an excellent case study for investors.
With that in mind, Tepper had nearly 25% of his Appaloosa portfolio invested in three artificial intelligence stocks as of the March quarter: Amazon (AMZN 0.22%) accounted for 10%, Microsoft (MSFT 1.31%) accounted for 8.7%, and Nvidia (NVDA -0.68%) accounted for 5.9%. All three stocks have been brilliant investments over the last five years, outperforming the S&P 500, and Tepper clearly remains confident in their ability to beat to the market.
Are these technology stocks worthwhile investments?
Amazon: 10% of Tepper’s portfolio
Amazon looked strong in the first quarter. Revenue increased 13% to $143 billion on accelerating sales in advertising and cloud services. Meanwhile, the company’s continued focus on operating efficiency helped GAAP net income triple to reach $0.98 per diluted share. Amazon is well positioned to maintain that momentum given its growth prospects across three markets.
Specifically, Amazon operates the largest online marketplace in North America and Western Europe. It is also the biggest retail media company in the United States, and the third biggest ad tech company worldwide. And Amazon Web Services (AWS) is the market leader in cloud infrastructure and platform services revenue. In short, Amazon will undoubtedly benefit as the e-commerce, digital advertising, and cloud services markets expand.
Cloud computing is a particularly important opportunity because it overlaps with artificial intelligence (AI). To elaborate, running AI workloads in the cloud is generally more cost effective than purchasing equipment for on-premises data centers, so more businesses should gravitate toward the cloud in the coming years. As the leader in cloud infrastructure services, AWS is well positioned to benefit from AI’s gravitational pull. But the company is also leaning in with new products like Amazon Bedrock, a platform that supports the fine-tuning of large language models and the development of generative AI applications.
Going forward, Wall Street expects Amazon to grow earnings per share at 23% annually over the next three to five years. That consensus estimate makes its current valuation of 51.5 times earnings seem fairly reasonable. Personally, I would be comfortable buying a small position in this AI stock today.
Microsoft: 8.7% of Tepper’s portfolio
Microsoft reported solid financial results in the third quarter of fiscal 2024 (ended March 31), beating expectations on the top and bottom lines. Revenue increased 17% to $61.9 billion, an acceleration from 7% growth in previous year. That was driven by momentum in enterprise software and cloud computing, which itself was partially due to demand for artificial intelligence products. Meanwhile, GAAP net income jumped 20% to $2.94 per diluted share.
Microsoft has emerged as the leading cloud provider in the generative AI gold rush. Indeed, CEO Satya Nadella says 65% of Fortune 500 companies use Azure OpenAI Service, a product that empowers businesses to build generative AI applications with OpenAI large language models, including the models that power ChatGPT. Last year, Azure accounted for 30% of revenue related to generative AI models and platform services, second only to OpenAI, according to IoT analytics.
Meanwhile, Microsoft is also integrating generative AI features into its software products. Copilot for Microsoft 365 complements its business productivity software by automating tasks in Word, Excel, PowerPoint, and Teams. Microsoft has also introduced copilots that complement its enterprise resource planning software by automating tasks across its sales, service, and finance applications. Nearly 60% of the Fortune 500 use a Microsoft Copilot product.
Going forward, Microsoft will undoubtedly benefit as the enterprise software and cloud services markets expand, helped along by growing demand for artificial intelligence. Indeed, Wall Street expects earnings per share to grow at 13.7% annually over the next three to five years. But that consensus makes its current valuation of 38.8 times earnings look expensive.
Personally, I question whether Microsoft can beat the market from its current price. I would be more comfortable buying shares at a cheaper multiple, closer to 30 times earnings. But Microsoft is a financially healthy business with a strong competitive position in several markets and excellent growth prospects, so eager investors could purchase a small position today.
Nvidia: 5.9% of Tepper’s portfolio
Nvidia reported phenomenal financial results in the first quarter, beating Wall Street’s expectations on the top and bottom lines. Revenue increased 262% to $26 billion on strong momentum in the data center product category, which itself was driven by demand for AI hardware solutions. Meanwhile, non-GAAP net income soared 461% to $6.12 per diluted share.
Nvidia graphic processing units (GPUs) are synonymous with accelerated computing and AI infrastructure. In fact, the company holds 90% market share in data center GPUs and 80% market share in AI chips. But Nvidia is truly formidable because it offers a full-stack accelerated computing platform comprising hardware, software, and services purpose-built for AI.
That full-stack strategy affords the company a durable economic moat. Nvidia not only sells the fastest AI chips on the market, but also offers the most robust ecosystem of supporting software for developers. More broadly, Nvidia is innovating rapidly across its portfolio of data center products. Argus analyst Jim Kelleher highlighted that advantage in a recent note to clients. “Nvidia’s expertise, market leadership, and continued investment in new technology puts it several generations ahead of rivals and gives it a sustainable advantage in its markets.”
Going forward, Wall Street expects the company to grow earnings per share at 32% annually over the next three to five years. That makes its current valuation of 76.7 times earnings seem slightly expensive. Personally, I would still feel comfortable buying a few shares today, but I would limit my purchase to 1% of my portfolio.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
