Billionaire Chase Coleman Has 20% of His Portfolio Invested in 2 Brilliant AI Stocks (Hint: Not Palantir)

Key Points

• Billionaire Chase Coleman runs a hedge fund that crushed the S&P 500 over the last three years; he currently has 20% of his portfolio invested in Alphabet and Microsoft.

• Alphabet has reasserted itself as a leader in AI with its Gemini models, which have helped the company defend its search dominance and gain market share in cloud computing.

• Microsoft started investing in OpenAI in 2019, a brilliant decision that has since helped the company bring generative AI features to its software products and cloud platform.

• 10 stocks we like better than Alphabet ›

Billionaire Chase Coleman runs Tiger Global Management, a hedge fund that outperformed the S&P 500 (SNPINDEX: ^GSPC) by 101 percentage points during that last three years. That makes him an excellent source of inspiration for individual investors.

As of February, Chase Coleman had 20% of his portfolio invested in two artificial intelligence (AI) stocks: 11.2% in Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) and 8.9% in Microsoft (NASDAQ: MSFT). Interestingly, Tiger Global does not own a position in Palantir Technologies, a company on the forfront of AI revolution.

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Here’s what investors should know about Alphabet and Microsoft.

Image source: Getty Images.

Alphabet: 11.2% of Chase Coleman’s portfolio

Alphabet was caught flatfooted when OpenAI released ChatGPT in November 2022. The company had been considered a leader in artificial intelligence (AI) research, yet it was upstaged by little-known start-up from San Francisco. OpenAI not only captivated Wall Street, but also Main Street, as its generative AI application quickly went viral.

ChatGPT raised questions about whether Alphabet would lose its dominance in internet search, which itself is the cornerstone of its digital advertising business. While its initial response was embarrassing — its Bard chatbot gave an incorrect answer during a promotional video — the company has since quelled those worries with a slew of successful AI products.

Alphabet has added generative AI capabilities to Google Search with AI Overviews (content summaries) and AI Mode (interactive conversations). Those capabilities are powered by proprietary Gemini models, and they have led to greater engagement with the search engine. Alphabet has also added generative AI development tools (including its Gemini models) to Google Cloud, and it has steadily gained market share in recent quarters.

“We continue to view Alphabet as unusually well positioned across the AI stack — owning differentiated infrastructure, frontier models, and global distribution,” wrote fund managers at Jensen Investment. That advantage lets Alphabet monetize AI in multiple ways, including ad relevance, consumer features, and enterprise cloud services.

Wall Street expects Alphabet’s earnings to increase at 15% annually over the next three years. That makes the current valuation of 28 times earnings look reasonable. Alphabet stock has increased 20% during the last six months, but the current price is still an attractive buying opportunity for patient investors.

Microsoft: 8.9% of Chase Coleman’s portfolio

While Alphabet stumbled after the release of ChatGPT, Microsoft quickly emerged as a leader in generative AI because it had been the exclusive cloud provider to OpenAI since 2019, when it made the first of several large investments in the start-up. While the partnership has since become less restrictive, Microsoft still benefits from the company’s success.

Microsoft is entitled to 20% of OpenAI’s revenue until 2032, and its cloud computing business Azure is still the exclusive cloud provider for stateless API (application programming interface) calls to Open AI models. That means any application or tool that uses OpenAI models via API must be hosted on Azure infrastructure. Also, Microsoft has an exclusive license to incorporate OpenAI models into its copilots.

Copilots are conversational assistants that bring generative AI capabilities to existing software products. Microsoft has built copilots for its office productivity, enterprise resource planning, low-code development, and business intelligence software. The number of paid Microsoft 365 Copilot seats rose 160% in the past year, according to CEO Satya Nadella.

Meanwhile, Microsoft Azure has steadily gained market share in cloud infrastructure and platform services due to deep integration with enterprise software, support for hybrid cloud environments, and exclusive rights to OpenAI APIs. And Morgan Stanley‘s latest CIO survey ranks Azure as the public cloud platform most likely to gain market share in the future.

Wall Street expects Microsoft’s earnings to increase at 13% annually over the next three years. That makes the current valuation of 26 times earnings look reasonable. As a caveat, software stocks have been volatile due to concerns that AI coding tools will replace many products. But those concerns are likely overblown. With the stock 26% below its high — its second steepest decline in the last decade — Microsoft looks attractive here.

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Trevor Jennewine has positions in Palantir Technologies. The Motley Fool has positions in and recommends Alphabet, Microsoft, and Palantir Technologies. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.