Third Point is heavily invested in Amazon, Microsoft, and Taiwan Semiconductor.
Dan Loeb is the founder and CEO of Third Point, an institutional asset manager whose flagship Offshore Fund has returned 13.1% annually since its inception in 1996. Meanwhile, the S&P 500 (^GSPC 0.13%) has returned 9.4% annually during the same period.
Loeb is “one of the most successful hedge fund managers of his generation,” according to The Wall Street Journal. And while Third Point underperformed in 2022 and 2023, its long-term outperformance makes Loeb a good case study for investors.
Loeb has compared artificial intelligence (AI) to disruptive technologies like the internet and smartphones, and AI a prevalent theme in his investments. Somewhat surprisingly, Third Point does not have a position in Nvidia, but it did have 23.1% of $8.7 billion portfolio invested in three AI stocks as of June:
Here’s what investors should know.
Amazon: 11% of Dan Loeb’s portfolio
Amazon operates the largest e-commerce marketplace in North America and Western Europe. The company has used the scope of its retail business to secure a strong presence in digital advertising. But its greatest opportunity to make money on artificial intelligence (AI) lies in its cloud computing business, Amazon Web Services (AWS).
AWS is the leader in cloud infrastructure and platform services, and its market share increased one percentage point between the first and second quarters of 2024. That scale means AWS is uniquely positioned to benefit from AI simply because it already has such a large customer base, and they are more likely to lean on AWS for AI services when/if the need arises as opposed to working with a new cloud provider.
AWS has also extended its ability to monetize AI with new products like coding assistant Amazon Q and generative AI development platform Amazon Bedrock. CEO Andy Jassy recently told analysts, “Our AI business continues to grow dramatically with a multibillion-dollar revenue run rate despite it being such early days.”
Looking ahead, Wall Street expects Amazon’s earnings to increase at 25% annually through 2025. That makes the current valuation of 44 times earnings look tolerable. I think that’s a reasonable entry point for patient investors, and I would feel comfortable buying a small position in this stock today.
Microsoft: 8.4% of Dan Loeb’s portfolio
Microsoft is monetizing AI across its software and cloud businesses. New generative AI copilots for its business productivity and enterprise resource planning platforms are gaining traction. The number of workers that use Copilot for Microsoft 365 daily nearly doubled in the most recent quarter, and the total number of customers increased more than 60%.
Microsoft Azure is steadily gaining share in cloud services because of strength in cybersecurity, analytics, and artificial intelligence. Its partnership with OpenAI has been instrumental in attracting new customers. Azure is the only public cloud that allows developers to build generative AI applications with the large language models that power ChatGPT.
Loeb wrote in a recent investor letter, “This new technology favors incumbents who are deploying their financial and intellectual war chests to win the AI arms race. Right now, what we see as the best-run ‘legacy’ companies like Microsoft and Amazon (both of which we own) have built enormous competitive advantages and seen their growth vectors accelerate.”
Wall Street expects Microsoft’s earnings to grow at 13% annually through fiscal 2026 (ends June 2026). That makes the current valuation of 36 times earnings look rather expensive. I think Microsoft is a well-managed company with compelling growth prospects, but I would avoid the stock at its current price.
Taiwan Semiconductor: 4% of Dan Loeb’s portfolio
Taiwan Semiconductor Manufacturing Company, or TSMC, is the leading semiconductor foundry as measured by revenue. That gives the company an important advantage in a capital-intensive industry. TSMC’s ability to outspend peers on R&D keeps it on the cutting edge of semiconductor manufacturing technology, sometimes called process technology.
Phelix Lex at Morningstar highlighted that advantage in a recent note. To paraphrase his commentary: Process technology leadership means TSMC is consistently improving chip PPA (power, performance, and area), cost per chip, and time to market, all of which are essential for computing devices to be competitive. It also lets TSMC charge higher prices than its peers.
TSMC’s process technology leadership has also won the company high-profile customers like Apple, AMD, Nvidia, Qualcomm, and Broadcom, which itself designs custom semiconductors for Alphabet‘s Google and Meta Platforms. All of those companies are spending heavily on artificial intelligence, which benefits TSMC.
Dan Loeb explained his investment thesis in a recent investor letter:
“Google was the first mover to custom accelerators with the TPU almost 10 years ago, and today this is already a multi-billion dollar business for TSMC. Amazon, Microsoft, and Meta have all followed Google’s lead and have announced (and in Amazon’s case already mass producing) their own chips. As these products scale, we see TSMC’s AI revenue growing by multiples in the coming years.”
Looking ahead, Wall Street expects TSMC to grow earnings at 29% annually through 2025. That makes the current valuation of 31 times earnings look reasonable. I would feel comfortable buying a small position in this stock today.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, 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 Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and 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.
Add Comment