Investing in fundamentally strong growth companies with sustainable competitive advantages can be a smart long-term strategy for astute investors. With artificial intelligence (AI) emerging as a major investment trend, it is no surprise that billionaires have also been actively pursuing high-quality AI-powered stocks.
Broadcom (NASDAQ: AVGO) and Apple (NASDAQ: AAPL) seem to fit the bill and have been picked up by multiple billionaire investors and investment funds. Here's why retail investors should also follow their path and consider taking at least a small position in these stocks now.
Broadcom
Semiconductor chip designer and enterprise software player Broadcom's shares are up 25% in 2024. While a 10-for-1 stock split in July 2024 played a major role in improving investor sentiment, many billionaire investors identified the growth potential in this stock in the second quarter of 2024. Some prominent ones were Ken Griffin's Citadel Advisors, the late Jim Simons' Renaissance Technologies, Ken Fisher's Fisher Asset Management, Israel Englander's Millennium Management, Jerome Dodson's Parnassus Investments Holdings, and DE Shaw's David Shaw.
The increasing adoption of complex AI technologies has emerged as one of Broadcom's most prominent growth catalysts. Broadcom accounts for nearly 80% share of the data center networking chips market. In the third quarter of fiscal 2024 (ended Aug. 4), the company's networking segment revenue soared 43% year over year to $4 billion. The solid performance was driven by robust demand from hyperscalers for the company's AI-optimized networking solutions and custom AI accelerators.
In the third quarter, sales of Ethernet switching products such as Tomahawk 5 and Jericho3-AI were up more than fourfold year over year. Sales of custom AI accelerators, which can be more efficient for specific activities instead of general-purpose GPUs, were up 3.5 times year over year in the third quarter. The AI accelerator business is very profitable and scalable and has high barriers to entry. Subsequently, the company has raised its fiscal 2024 AI revenue projection from $11 billion to $12 billion.
The acquisition of virtualization software technology player VMware has also strengthened Broadcom's enterprise software portfolio and reduced its reliance on hardware sales. VMware contributed $3.8 billion in sales in the third quarter. The company expects the high-margin VMware business to enable the company to achieve an adjusted EBITDA margin of almost 64% by the end of fiscal 2024.
Broadcom's share price tumbled nearly 10% in late-morning trading on Sept. 6, the day after it released third-quarter results. Although the company surpassed analyst revenue and earnings estimates, a weaker-than-expected fourth-quarter forecast seems to have adversely affected investor sentiment. However, this reaction seems overdone for a stock like Broadcom with solid fundamentals and robust growth prospects, and will most likely be short-lived.
Considering the many pros and the current dip in share prices, Broadcom seems like a great stock to buy in September 2024.
Apple
Although Warren Buffett's investment company Berkshire Hathaway reduced its stake in technology titan Apple by nearly 50% in the second quarter of 2024, many other billionaire investors have been piling on this stock. A few of the prominent ones are Fisher's Fisher Asset Management, Englander's Millennium Management, Jeremy Grantham's Grantham Mayo Van Otterloo, Griffin's Citadel Advisors, Andreas Halvorsen's Viking Global Investors, and Sander Gerber's Hudson Bay Capital.
Apple posted impressive results for the fiscal third quarter of 2024 (ended June 29), with revenue and earnings surpassing analysts' average estimates. The company's ecosystem of products and services saw robust demand despite ongoing macroeconomic pressures.
Historically, the iPhone has been the major growth catalyst for Apple. Although iPhone sales were down 1% year over year to $39.3 billion in the third quarter, a recent Kantar survey showed iPhone models to be the top-selling smartphone in many key markets, such as the U.S., urban China, the U.K., Germany, Australia, and Japan.
Apple recently launched the generative AI technology Apple Intelligence, which will be integrated into its entire product line. The company expects Apple Intelligence to drive more customers to upgrade to newer iPhones capable of running these AI services. The company is gearing up to launch the iOS 18 operating system to make the iPhone more personalized, intelligent, and capable. Coupled with the iPhone's installed base reaching a new all-time high at the end of the third quarter, the iPhone upgrade cycle can be a major catalyst for Apple in the coming years.
Apple's digital services segment also reported an all-time revenue high of $24.2 billion, up 14% on a year-over-year basis. The services business is critical in securing recurring revenue streams and building a steady customer base. Services are seeing rising customer demand, thanks to the company's huge installed base of devices. Apple ended the third quarter with more than 1 billion paid subscriptions across the services segment, more than double four years ago. With the highly profitable services business becoming a bigger part of Apple's business, the company's margins are well positioned to widen in future quarters.
Apple is trading at trailing-12-month price-to-sales ratio (P/S) of 8.64 times, significantly higher than its five-year average (P/S) of 6.92 times. Despite the elevated valuation, the stock seems attractively priced when compared with the majority of the other AI-powered technology titans.
It may make sense for investors to piggyback on several of the billionaires' investment analyses and consider picking up at least a small stake in this stock now.
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Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Billionaires Are Buying These 2 Top Artificial Intelligence (AI) Stocks Hand Over Fist was originally published by The Motley Fool