We recently published a post about billionaire Paul Singer saying to stay away from these seven AI bubble stocks, as well as a list of the three tech stocks he’s buying: Meta Platforms Inc (NASDAQ:META) is ranked third on the list, so it’s worth taking a closer look.
Billionaire Paul Singer’s Elliott Management reportedly said in its latest letter to investors that shares of AI tech giants are in a “bubble” and that NVIDIA is “overvalued.” In the letter, the fund expressed skepticism that tech companies will continue to buy AI chips in large quantities, adding that AI is “overvalued and many applications are not ready for prime time.” It also argued that many AI use cases “will never be cost-effective, never work properly in practice, or will prove to be energy-hungry and unreliable.” In the letter, the fund reportedly said that AI is effectively software that has failed to deliver “value to the hype.”
Elliott Management, the $66 billion firm founded by billionaire Paul Singer, one of America’s most feared activist investors, said there are “few real-world uses” for AI beyond “compiling meeting notes, preparing reports and assisting with computer coding.”
In a letter, Elliott Management said it would stay away from “bubble” stocks in the Magnificent Seven group.
Elliott Management posted a modest gain of 4.7% last year, but the firm has a record of not having a losing year since the financial crisis of 2008. Since its founding in 1977, the fund has had just two losing years, a rare feat in the hedge fund industry.
Elliott calling mega-cap AI stocks a bubble is a big development, but it’s by no means surprising: Many investors and market experts have been warning about the hype surrounding leading AI stocks.
“We believe that Elliott Management’s AI stocks are a game changer,” said Inan Dogan, founder and research director at Insider Monkey, about his latest take on Elliott Management’s AI stocks.
“I say NVDA’s market cap assumes the company will make about $150 billion in profits in perpetuity, which is crazy. Elliott said the same thing, and it’s in the news! Investors don’t know how to bet on the AI revolution, so the only visible companies they think will benefit are semiconductor and cloud companies. That’s why they’re flocking to NVDA. It’s not that other tech companies are in a bubble. In contrast, if Elliott is right that other megacaps are currently overinvested in NVDA chips, this means that their revenues are undervalued and they are actually much more profitable and cheaper than Elliott thinks. That’s why NVDA and the cloud companies are in different categories. NVDA may be in a bubble, but I don’t know that the other megacaps in the Magnificent Seven group are in a bubble.”
In this article, we analyzed the top AI stocks from the Mag. 7 group that Paul Singer says are in a bubble. We also looked at three AI/tech stocks that were in Singer’s portfolio at the end of the first quarter of this year. Why are we interested in stocks that hedge funds are flocking to? The reason is simple: our research shows that you can outperform the market by mimicking the top picks from the best hedge funds. Our quarterly newsletter strategy selects 14 small and large stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (more here).
Is billionaire Paul Singer telling you to stay away from Meta Platforms Inc (NASDAQ:META) AI bubble stock?
Photo by Alexander Shatov on Unsplash
Meta Platforms, Inc. (NASDAQ:META)
Number of hedge fund investors: 246
Meta Platforms is a key player in a group of magnitude 7 stocks that are in a bubble according to Elliott Management.
Meta Platforms (NASDAQ:META) beat analyst expectations by a wide margin in its latest quarterly results, signaling that the company’s huge investment in AI will pay off in the future. After the earnings release, Citi said it maintained an “increasingly positive” view on Meta Platforms (NASDAQ:META) shares due to improved engagement and monetization, as well as expanding margins. Citi raised its price target on META to $580 from $550.
JPMorgan said it believes AI will benefit Meta Platforms Inc (NASDAQ:META) on three levels: improvements to the core family of apps (FoA), new opportunities and experiences, and the expansion of the metaverse. It also raised its price target for META to $610 from $480.
Morgan Stanley also praised Meta Platforms Inc (NASDAQ:META) for its use of AI to improve its recommendation system and quality.
The market has been reluctant to support Meta Platforms Inc (NASDAQ:META) in investing heavily in AI. What does Meta want to achieve with its AI investment? The company wants to use AI to improve engagement, using language models such as Llama 3 to improve user interaction, increase engagement, and monetize more effectively from its 3.2 billion daily active users.
But can Meta Platforms Inc (NASDAQ:META) sustain this high spending? The company has a free cash flow margin of about 30% and is on track to post $50 billion in free cash flow this year. Based on this target, the stock is trading at about 26 times this year’s free cash flow. If the current trajectory continues, Meta Platforms Inc (NASDAQ:META) could post $58 billion in free cash flow by next year, meaning the stock is trading at 21 times next year’s free cash flow. With a massive net cash of $35 billion, a strong user base, and a key position on the consumer side of the AI industry, Meta Platforms Inc (NASDAQ:META) could be a solid long-term investment.
Polen Focus Growth Strategy said the following about Meta Platforms, Inc. (NASDAQ:META) in its Q2 2024 investor letter:
“The largest contributors to portfolio performance in the second quarter were stocks we do not own, including Home Depot, Meta Platforms Inc. (NASDAQ:META) and AbbVie. Meta Platforms delivered solid results during the period with revenue growth accelerating in the first quarter. However, Meta’s revenue comparisons get tricky from here, and its second quarter revenue guidance fell short of market expectations. After an “efficiency year” in which the company reduced costs in its core business, management is now signaling further spending on GenAI and the Metaverse, raising concerns about future margins. By our calculations, spending on the Metaverse is currently over $20 billion annually with little to no expected growth in the near future.”
Overall, Meta Platforms Inc (NASDAQ:META) ranks third on Insider Monkey’s list of “Billionaire Paul Singer Says to Stay Away from These 7 AI Bubble Stocks; 3 Tech Stocks He’s Buying”. While we acknowledge the potential of Meta Platforms Inc (NASDAQ:META), we believe AI stocks are more likely to deliver higher returns and do so in a shorter time frame. If you’re looking for AI stocks that are more promising than META but still trade for less than 5x its earnings, check out our report on the cheapest AI stocks.
Read next: Analysts see a new $25 billion “opportunity” for NVIDIA, and Jim Cramer recommends these stocks.
Disclosures: None. This article was originally published on Insider Monkey.