It's hard to get broad agreement on much these days, as I'm sure we all see heading into election season. But one area of agreement, at least among billionaire hedge fund managers, is that investing in big tech stocks like Alphabet (GOOG -0.79%) (GOOGL -0.83%), Meta Platforms (META -1.05%), and Nvidia (NVDA 0.23%) is wise. It's been lucrative lately, with Nvidia leading the way, as shown below.
Of the 16 hedge funds analyzed by The Motley Fool, at least 10 have the three stocks named above among their top 10 tech holdings (as of the fourth quarter of 2023).
Here are some reasons, so you can determine if they should also be in your portfolio.
Alphabet
By diving into its financial results, it's easy to see why Alphabet is a favorite of hedge funds. In 2023, the company produced $307 billion in revenue and $84 billion in operating income. It followed this up with $81 billion in revenue and $25 billion in operating income in the first quarter, year-over-year gains of 15% and 46%, respectively. The 32% operating margin in the first quarter is particularly impressive. But perhaps the best quality is its ability to generate cash flow.
Alphabet produced $102 billion in cash from operations (CFO) in 2023 and $29 billion in the first quarter of 2024, putting it on pace to smash the 2023 figure. Cash from operations is an important metric because it shows how a company's primary business performs and how much of the profit converts to cash. Since CFO is even higher than operating income, it confirms that Alphabet's earnings are high quality.
It's been decades since there was any true challenge to Google Search's dominance. However, the release of ChatGPT and Microsoft's investment in bringing it to Bing were wake-up calls. Since then, Alphabet has answered with artificial intelligence (AI) tools of its own. The company has developed them for years, but they are finally coming to the market.
Gemini is its most advanced generative-AI chatbot yet, able to answer complex queries, assist with coding, and much more. For instance, if you want to update your resume, you can list your experience and qualifications and Gemini will produce a sample resume almost instantly.
Alphabet's current price-to-earnings (P/E) ratio is 27, close to its five-year average. With its tremendous cash flow and continued growth, the stock is an excellent long-term investment.
Meta Platforms
Meta, formerly Facebook, is making a big push to lead the AI arms race. Meta AI is a large language model (LLM) virtual assistant capable of answering complicated queries, solving complex problems, and other functions. It is Meta's answer to ChatGPT and is available on platforms like Facebook, Messenger, Instagram, and WhatsApp.
At its heart, Meta is an advertising company; 98% of first-quarter revenue was from advertising. The more users and more time spent on its apps, the more revenue it will make. Meta AI could keep users from leaving the app for rivals, like ChatGPT or Google when looking for chatbot-type services.
Meta's total revenue hit $36.5 billion in the first quarter with impressive 27% year-over-year growth. Operating income leaped from $7.2 billion to $13.8 billion.
Tiger Global Management appears to be Meta's biggest fan, as 19% of its tech portfolio is dedicated to its stock. Meta's current P/E ratio is slightly higher than its five-year average; however, the average is skewed to the downside by the stock's huge decline in 2022, as shown below.
META PE ratio data by YCharts.
This means the stock is likely close to its fair value. Meta also introduced its first-ever dividend this year. The yield is small now, at less than 1%, but given the company's profitability, it could rise significantly over time. Meta's recent results are terrific, making it easy to see why it is a billionaire favorite.
Nvidia
Nvidia's rise to become the most valuable company on the planet is incredible, and it was built on our endless appetite for data. Nvidia's graphic processing units (GPUs) and software are crucial components for data centers and are even more in demand due to the rise of AI.
Cloud software, data processing and storage, streaming services, and banking all rely on data centers to function. So-called hyperscaler data centers (many over 100,000 square feet) are expected to increase by over 100 annually for the next decade, according to one source, providing Nvidia with a long runway still.
Nvidia didn't disappoint in the first quarter, posting a 262% year-over-year increase in total revenue to $26 billion. Its data center sales exploded again to $23 billion, a 427% year-over-year increase. The 10-for-1 stock split also excited investors, although stock splits have no direct effect on the company's or shareholders' value.
Of the 16 billionaire portfolios studied, Nvidia is in the top-10 tech holdings of 10, with several having it in the top three. However, new investors in Nvidia should consider the valuation before jumping in with both feet.
Its current P/E is more than 70. This drops to 47 on a forward basis but still dwarfs Microsoft's (MSFT 0.08%) own lofty valuation.
Nvidia will have a long, prosperous future, but consider dollar-cost averaging or waiting for a dip to accumulate shares now.
Most billionaires didn't get wealthy by accident. These hedge funds study data, hire industry experts, and make shrewd stock buys. While investors should not blindly follow their lead, examining their top picks is a terrific place to get ideas.
