Year two of Wall Street's bull market rally didn't disappoint investors. When the curtain closed on 2024, the mature stock-driven Dow Jones Industrial Average, broad-based S&P 500, and growth-fueled Nasdaq Composite respectively ended the year higher by 13%, 23%, and 29%.
These gains were powered by a confluence of factors, including excitement for stock splits, improved corporate earnings, and even Donald Trump's November victory. Trump's first term in the White House saw the Dow, S&P 500, and Nasdaq Composite climb by 57%, 70%, and 142%, respectively.
But among these catalysts, none have been more front-and-center than the rise of artificial intelligence (AI). Incorporating AI into software and systems is a $15.7 trillion addressable market by 2030, based on the forecast of PwC in Sizing the Prize.
Image source: Getty Images.
This otherworldly potential for AI isn't lost on Wall Street's top money managers. A number of billionaire investors have been placing their bets on the AI revolution, including Dan Loeb, the founder of investment hedge fund Third Point.
Based on Form 13F filings with the Securities and Exchange Commission, which allows investors to track the trading activity of Wall Street's top asset managers, Loeb closed out the September quarter with $7.43 billion in assets under management spread across 42 stocks. What's most notable about Third Point's third-quarter 13F is what trades were made in the AI arena.
Loeb sold all of his fund's shares in what's arguably one of the cheapest AI leaders in favor one of Wall Street's priciest AI stocks.
Dan Loeb's Third Point dumps its entire stake in Alphabet
Although Loeb and his team tend to be fairly active -- the average holding time for Third Point's more than three dozen holdings is only 17 months -- perhaps the most surprising of all moves in the September-ended quarter was exiting the fund's entire stake in Alphabet (GOOGL 0.16%) (GOOG 0.20%), which totaled 1.98 million shares on June 30.
Profit-taking is the most-logical of all reasons that potentially explains why Loeb rang the register. He initially oversaw the purchase of Alphabet shares during the first quarter of 2023. Alphabet spent much of its time vacillating between $90 and $100 per share in early 2023. Meanwhile, Alphabet stock hovered between $150 and $170 per share during the third quarter of 2024. That's a compelling gain in less than two years.
Loeb and his team may have also been concerned about history running its course when it comes to next-big-thing innovations. Since the advent of the internet roughly three decades ago, every game-changing technology and innovation has endured an early stage bubble-bursting event. This is a function of investors consistently overestimating the early innings utility of a new technology/innovation. With most businesses lacking a game plan to generate a positive return on their AI investment, the probability of an AI bubble brewing appears to be growing.
However, Loeb's exit from Alphabet is also a head-scratcher in other respects.
For instance, Alphabet's advertising segments are still firing on all cylinders. Google is the world's leading internet search engine and has maintained an 89% to 93% share of global internet search looking back over the last decade, according to data from GlobalStats. Businesses wanting to target users are going to pay a premium to get their message(s) on Alphabet's platforms -- which also includes streaming platform YouTube (the No. 2 social site by monthly active users).
There's also no evidence of a slowdown in Alphabet's higher-margin cloud infrastructure services platform Google Cloud. This segment became recurringly profitable in 2023 and hasn't looked back, with Google Cloud pacing more than $45 billion in annual run-rate revenue. Incorporating generative AI solutions into Google Cloud is expected to accelerate this segment's long-term growth prospects.
The other head-scratcher is that Alphabet remains historically inexpensive. The company's forward price-to-earnings (P/E) ratio of 21.8 is 6% below its trailing-five-year average forward P/E, and it's valued at a 10% discount to its average cash flow multiple over the last five years.
Suffice it to say, Loeb may regret ringing the register on Alphabet.
The Model 3 is Tesla's best-selling sedan. Image source: Tesla.
Dan Loeb is piling into one of Wall Street's priciest AI stocks
On the other end of the spectrum, Loeb and his team of advisors at Third Point added to four existing holdings and purchased nine new stocks during the September-ended quarter. None of these purchases stands out more than the 400,000 shares bought of electric-vehicle (EV) maker Tesla (TSLA -2.11%).
Artificial intelligence is at the heart of what Tesla does. The company's EVs are empowered by full self-driving (FSD) software and AI algorithms that uses cameras, ultrasonic sensors, and radar to navigate public roadways, pedestrians, and other obstacles. AI solutions are also used to maximize EV battery performance and optimize energy storage.
Loeb's fascination with Tesla may have to do with the long-term growth potential of EVs and the company's first-mover advantages. It's North America's leading EV producer -- 1.77 million EVs produced worldwide in 2024 -- and one of the only pure-play EV companies to generate a recurring profit.
Furthermore, Tesla has been diversifying its operations into energy solutions and infrastructure (including EV charging stations). Energy generation and storage revenue surged by 52% during the September-ended quarter from the prior-year period. Providing battery and storage solutions in a basic necessity sector may help Tesla better navigate the cyclical downturns that occur from time to time in the auto industry.
But it can be argued that this purchase is just as head-scratching as selling shares of Alphabet. For instance, Tesla's operating margin has notably shrunk due to more than a half-dozen sweeping price cuts for its fleet of EVs. CEO Elon Musk has previously stated that demand drives the company's pricing policy. A steady stream of price cuts, coupled with higher global EV inventory, is an unwelcome combination for the company's margins.
Another plain-as-day issue is that more than half of Tesla's pre-tax income originates from unsustainable sources, which includes interest income on its cash and regulatory tax credits. A high-growth company valued at a nosebleed premium should be generating its profits from its products and not from unsustainable sources.
There's also a lengthy history of unmet promises with Tesla. While Musk has overseen the rollout of new EVs as the company's chief, he's also failed to bring robotaxis to public roads, as previously promised, and hasn't advanced Tesla's FSD past Level 2 autonomy. If these unmet promises are backed out of Tesla's valuation, much of the company's market cap would, arguably, disappear.
Paying 131 times forward-year earnings for a company with margins and earnings per share that have weakened in recent years is questionable, at best.
