Daniel Loeb, the 62-year-old chief executive of Third Point, represents one of his era’s top hedge fund managers.
Third Point, founded by Loeb in 1995, managed $11.5 billion as of March 31. He began his career as a junk bond salesman, and his customers included hedge fund heavyweight David Tepper, now owner of the NFL’s Carolina Panthers.
Loeb’s big bets on stocks and debt securities have paid off. Despite a few stumbles over the years, Third Point has generated a stellar average annualized return of 16% after fees over the 28 years that ended in September, according to The Wall Street Journal.
Before fees, the S&P 500 had annualized returns of 10% over the 28 years through Dec. 31.
His success suggests investors might want to follow in Loeb’s footsteps. What’s he like now? Tech stocks. Especially AI stocks.
He wrote in a letter to Third Point shareholders on April 30, “AI’s transformational potential is a key element of the thesis for nearly half of our equity positions today.”
“Unlike in past periods of technological paradigm shifts, this new technology favors incumbents who are deploying their financial and intellectual war chests to win the AI arms race.”
In particular, he cites Microsoft (MSFT) and Amazon (AMZN) , both of which Third Point owns. They are among “the best-run legacy companies, which have built enormous competitive advantages and seen their growth vectors accelerate.”
Alphabet’s Artificial Intelligence activity
Another company taking full advantage of the AI craze is Google’s parent company, Alphabet (GOOG) . Thanks to AI demand, the company’s Google Cloud division saw revenue soar 28% in the first quarter.
Many young AI companies are led by former Alphabet employees, leading them to use Google Cloud for their computing services, Bloomberg points out.
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With its initial foray into AI, Google had some setbacks, such as glitches in its Gemini chatbot. But it now seems to have found its footing.
The company has restructured several times to train and launch AI offerings more quickly. To drive future search traffic, it is pivoting to large language models (LLMs) like Gemini.
An LLM is an AI program that recognizes and generates text. OpenAI’s ChatGPT was the first of these generative AI programs to gain widespread adoption because it can quickly search, parse, and create content.
Alphabet remains dominant in Internet search, with search advertising revenue jumping 14% in the first quarter. However, it has been under pressure to maintain its market share since Microsoft incorporated ChatGPT into its Bing search engine last year.
Loeb likes Alphabet, saying in his letter that he made a “substantial investment” in the company during the first quarter.
“We have long admired its exceptional business model and its proven ability to maintain a leading position across an array of pre-eminent products such as Search, Gmail, Android, GCP [Google Cloud Platform], and YouTube,” Loeb wrote.
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Alphabet’s critics aren’t know-nothings, Loeb said. It’s legitimate to worry that in “an AI world, changes in the way consumers interact with their personal devices and with the Internet can [threaten] Alphabet’s core search business.”
Why Daniel Loeb likes Alphabet
But on the plus side, “Alphabet has a substantial distribution and technology advantage over competitors,” he said. “And it’s positioned to use its AI capabilities to unify, enhance, and better monetize the entire suite of its products.”
Alphabet’s AI boo-boos have actually created a good buying opportunity for the stock, Loeb said. “Gemini’s initial blunders further contributed to the narrative that Alphabet will end up an AI loser,” he said.
“Assigning primacy to a small operational misstep while demoting the fact that the company has been building world-class capabilities in AI for over a decade, created an attractive entry point for a long-term investor.” That likely means Loeb.
More AI Stocks:
Alphabet traded at $167.65 on May 1, up 26% from March 6.
“We believe the moment when Gemini takes a seat at the economic table is approaching,” Loeb said.
And Google Search isn’t going away, he maintained. “We envision a world of greatly reduced content creation costs and a proliferation of information, a lot of it in the form of ad-supported content full of AI fakes,” Loeb said.
“Against that backdrop, Google Search will be increasingly important as a source of truth.”
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The author of this story owns shares of Amazon, Microsoft and Alphabet.
