According to Bret Taylor, co-founder of the AI startup Sierra, AI is “probably” a bubble drawing both “smart money” and “dumb money” to fund competitors across every layer of the tech stack. Describing himself as an AI optimistic, he believes that the free market will ultimately determine which AI players are serving the best products.
When everyone knows that AI is going to have a huge impact on the economy across a huge range of industries and workflows, money is plentiful..I think over the next few years, you’ll see a correction, you also see consolidation, but I don’t think you can get innovation without that kind of messy competition.
-Taylor told CNBC at the World Economic Forum in Davos, Switzerland.
Taylor believes that AI is going to have a huge impact across sectors, but adoption is going to take time as industries adjust, regulations evolve, and supporting infrastructure is built out.
If we are in an AI bubble as Taylor and numerous others believe, head of Google’s parent firm Alphabet Sundar Pichai believes every company is going to be impacted.
I think no company is going to be immune, including us.
Pichai also noted how even though the growth of AI investment had been an “extraordinary moment”, there has also been some “irrationality” in the current AI boom.
For this article, we selected AI stocks by going through news articles, stock analysis, and press releases. These stocks are also popular among hedge funds. The hedge fund data is as of Q3 2025.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 427.7% since May 2014, beating its benchmark by 264 percentage points (see more details here).
10. SAP SE (NYSE:SAP)
Number of Hedge Fund Holders: 34
SAP SE (NYSE:SAP) is one of the 10 AI Stocks Analysts Are Watching. On January 20, HSBC analyst Abhishek Shukla initiated coverage on the stock with a Hold rating and a price target of EUR178. The firm noted that SAP’s robust fundamentals and cloud-driven growth are already reflected in the share price, leaving room for limited upside.
HSBC noted how SAP’s valuation is already a reflection of its leadership in the ERP market and a robust double-digit earnings growth outlook. The firm forecasts its revenue to grow at a CAGR of 9.6% over 2025 to 2028, particularly as customers transition from on-premise software to the cloud.
It estimates 5% of on-premise customers to make the shift each year, slightly faster than recent years (about 4.5% over 2022 to 2025). These moves typically generate a revenue uplift of around 2.5 times.
At the same time, HSBC also flagged how the market may be too overoptimistic about how quickly customers migrate and the extent to which it boosts revenues and margins. An estimated 60% of SAP’s on-premise customers have yet to begin migrating to the cloud, even though maintenance fees are expected to rise in 2027 and support will end by 2030.
Rising competition, analysts flagged, may lead to customers delaying cloud upgrades. As such, current cloud backlog has shown passive growth, which is why the firm will look to fourth-quarter 2025 results for clearer signals.
SAP SE (NYSE:SAP) is a leader in ERP software that leverages artificial intelligence to enhance its enterprise resource planning (ERP) solutions.
9. Arm Holdings plc (NASDAQ:ARM)
Number of Hedge Fund Holders: 42
Arm Holdings plc (NASDAQ:ARM) is one of the 10 AI Stocks Analysts Are Watching. On January 21, Susquehanna analyst Christopher Rolland upgraded the stock from Neutral to “Positive” and maintained a price target of $150. The firm sees the recent pullback as a buying opportunity driven by robust growth drivers, particularly AI silicon initiatives and server CPU expansion.
Susquehanna’s upgrade on ARM comes despite recent market concerns about higher memory prices impacting the Mobile and PC markets. Previously, these concerns had led to several competitor downgrades, pressuring ARM’s share price.
The firm views this sell-off as an opportunity, citing two company-changing initiatives as key catalysts behind the upgrade. These include the development of an AI XPI ASIC in partnership with SoftBank and Broadcom for OpenAI, as well as a custom sever CPU, which is likely for Meta, marking its first full-silicon offering and meaningful expansion of its data center addressable market.
Other positives working in favor of the company include the migration from v8 to v9 products, early volume ramp of high-royalty CSS-based Aps, continued server CPU share gains at hyperscalers, and higher royalty rates driven by doubling of core counts and adoption of DC CSS designs.
Susquehanna acknowledges that a royalty reset is coming for 2026 models due to memory-driven headwinds in Mobile and PC markets, it believes these challenges are “well known” and that the subdued sentiment doesn’t seem to align with upcoming catalysts.
As such, we argue that depressed investor/sell-side sentiment and the stock’s recent ~40% correction stand in stark juxtaposition with these important coming initiatives that we believe could accelerate growth and royalties well beyond Arm’s model’s ~10% royalty contribution today. These catalysts should spur shares well and underpin our upgrade from Neutral to Positive, while we reiterate our $150 price target (27.5x EV/sales).
Arm Holdings plc (NASDAQ:ARM) is a semiconductor and software design company that designs and manufactures semiconductor technology and other related products.
