11 Most Promising AI Stocks According to Hedge Funds

In this article, we discuss the 11 most promising AI stocks according to hedge funds.

Artificial intelligence (AI) was a market savior in 2023. In 2022, when the Fed aggressively started to increase the interest rates to fight off the 40-year high inflation, most analysts were sure about the US economy going into a recession in 2023. However, they were proven wrong, as AI was like a wrecking ball that demolished all the predictions made by the bears. The S&P 500 is up 24.5% year-to-date (YTD) at the time of writing on December 19. The index owes most of its gains to the “Magnificent 7”, a term coined by Bank of America analyst Michael Hartnett for the top-performing tech stocks listed on the US stock exchange. 

As per our previous report, the Magnificent 7 stocks, including Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), Meta (NASDAQ:META), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), and Tesla (NASDAQ:TSLA), averaged collective gains of 50.65% while the rest of the S&P 493 declined by 2.05% in the first nine months of 2023.

Generative AI became the key driver of technology sector growth after the release of Microsoft Corporation (NASDAQ:MSFT) backed OpenAI chatbot ChatGPT. After that, several companies came up with their own generative AI tools used for several purposes, including but not limited to, text-to-image and video generation, music creation, and production of campaign ads. The semiconductor company NVIDIA Corporation (NASDAQ:NVDA) has been the star performer of the market throughout the year as it manufactures and sells products used to power and train generative AI tools. The company’s stock is up 244.36% YTD at the time of writing on December 19. Furthermore, Advanced Micro Devices, Inc. (NASDAQ:AMD) also unveiled its new artificial intelligence accelerator, Instinct MI300X. According to the company’s CEO, it is the most advanced accelerator in the industry and is becoming a tough competitor for NVIDIA Corporation (NASDAQ:NVDA)’s H200 graphic processing unit.

While several analysts and experts predict a slowdown or correction in the AI space, the rest of the market is quite positive about its future. One of the main reasons behind this is that AI is revolutionizing most of the industries of the market. The technology is bringing advancements in the automotive industry, which is evident in autonomous driving technology, mainly dependent on artificial intelligence. Artificial intelligence is also disrupting the healthcare segment as it is innovating the processes used for diagnosis and treatment, data management, mental health, and drug discovery. According to Morgan Stanley, AI will account for 10.5% of the healthcare budgets in 2024, almost double from the 2022 levels.

Cathie Wood of ARK Invest also keeps a positive sentiment toward the AI sector. Wood’s firm purchased 3.8 million shares of AI-driven drug discovery company Recursion Pharmaceuticals, Inc. (NASDAQ:RXRX) in mid-November. She believes that AI will be a part of every sector in the future. Cathie Wood’s Ark Innovation ETF (ARKK), which tracks disruptive technologies, including AI, has gained nearly 73% YTD at the time of writing on December 19. Ark Invest’s Big Ideas 2023 report says:

“Computational systems and software that evolve with data can solve intractable problems, automate knowledge work, and accelerate technology’s integration into every economic sector. The adoption of Neural Networks should prove more momentous than the introduction of the internet and create 10s of trillion dollars of value. At scale these systems will require unprecedented computational resources, and AI-specific compute hardware should dominate the Next Gen Cloud datacenters that train and operate AI models. The potential for end-users is clear: a constellation of AI-driven Intelligent Devices that pervade people’s lives, changing the way that they spend, work, and play. The adoption of artificial intelligence should transform every sector, impact every business, and catalyze every innovation platform.”

Artificial intelligence is expected to be the fastest-growing industry in the technology sector, reaching a market size of $2.57 trillion by 2032 from $454.12 billion in 2022, registering a compound annual growth rate of 19%. Keeping that in mind, some of the most promising AI stocks according to hedge funds include Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and Meta Platforms, Inc. (NASDAQ:META).

Pixabay/Public Domain

Our Methodology

For this article, we made a list of AI stocks using Insider Monkey’s proprietary hedge fund database that tracks 910 elite hedge funds as of the third quarter of 2023. From that list, we chose the companies with the highest number of hedge fund investors. Furthermore, we skipped the stocks whose hedge fund sentiment or dollar value of hedge fund investments dropped significantly in the third quarter.

The most promising AI stocks according to hedge funds, are listed in ascending order of their hedge fund sentiment.

11 Most Promising AI Stocks According to Hedge Funds

11. ServiceNow, Inc. (NYSE:NOW)

Number of Hedge Fund Holders: 99

ServiceNow, Inc. (NYSE:NOW) is a California-based company that offers enterprise cloud solutions with new generative AI capabilities integrated across its product portfolio.

On November 29, ServiceNow, Inc. (NYSE:NOW) announced that it entered into a collaborative agreement with Amazon.com, Inc. (NASDAQ:AMZN) to introduce its platform and solutions into Amazon Web Services (AWS) Marketplace as a Software-as-a-Service (Saas) offering.

ServiceNow, Inc. (NYSE:NOW) is one of the most promising AI stocks according to hedge funds, along with Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and Meta Platforms, Inc. (NASDAQ:META).

ClearBridge Investments mentioned ServiceNow, Inc. (NYSE:NOW) in its third quarter 2023 investor letter. Here is what it said:

“ServiceNow, Inc. (NYSE:NOW) is a leading provider of workflow automation software. We see the company as a key enabler of modernization and digital transformation, which is well-positioned as enterprises look to converge on a single platform solution. Despite its sizable customer base, we believe ServiceNow still has substantial room to expand spending with existing customers, as most have not fully leveraged its full product suite. We also are encouraged by the company’s strong leadership team and history of innovation which should enable it to continue to expand wallet share. Additionally, despite ongoing investments in growth, ServiceNow continues to drive healthy operating leverage.”

10. Advanced Micro Devices, Inc. (NASDAQ:AMD)

Number of Hedge Fund Holders: 110

Advanced Micro Devices, Inc. (NASDAQ:AMD) is a California-based company that designs, manufactures, and markets semiconductors and microprocessors. The company designs and sells AI-related hardware and provides AI solutions to its customers.

According to Insider Monkey’s database that tracks 910 hedge funds, the number of hedge funds with investments in Advanced Micro Devices, Inc. (NASDAQ:AMD)’s stock went down to 110 in Q3 from 112 in Q2, but the total stake value increased to $9.156 billion in Q3 from $6.93 billion in Q2. Ken Fisher’s Fisher Asset Management was the top investor, with 27.768 million shares worth $2.855 billion.

On December 6, Advanced Micro Devices, Inc. (NASDAQ:AMD) introduced its AI accelerator Instinct MI300X at its Advancing AI event. The company reiterated its revenue expectation of $2 billion from MI300 in 2024.

Artisan Partners commented on Advanced Micro Devices, Inc. (NASDAQ:AMD) in its second quarter 2023 investor letter. Here is what it said:

“Among our top contributors were Advanced Micro Devices, Inc. (NASDAQ:AMD), NU Holdings and Netflix. AMD’s data center CPUs are used in the cloud service provider (CSP) servers. In addition to the broader secular tailwind from cloud adoption, the company has a performance and pricing advantage over Intel, which we believe will enable it to continue capturing market share. However, the recent stock price rally was due to growing excitement around the company’s AI exposure. It will launch its new MI300 graphics processing unit (GPU) chip later this year to compete against the dominant market leader NVIDIA. Similar to its approach that won market share from Intel within the CPU market, AMD’s product will aim to provide similar performance at a more attractive price. AMD is already working with Microsoft and Meta, while Amazon publicly stated that it is evaluating AMD’s inferencing chips. Using assumptions around the total GPU market size, potential market share gains and price points, our research indicates this could be a $20 billion opportunity for AMD. That would nearly double its revenue. While the company has not historically missed many deadlines, there is execution risk as it works to manufacture and distribute these complex chips at scale, which, combined with an elevated valuation after the stock’s strong performance run, led us to trim the position.”

9. Adobe Inc. (NASDAQ:ADBE)

Number of Hedge Fund Holders: 112

Adobe Inc. (NASDAQ:ADBE) is a software company that has AI products in its portfolio including, Adobe Sensei and Adobe Firefly. 

On December 13, Adobe Inc. (NASDAQ:ADBE) posted its Q4 non-GAAP EPS of $4.27, topping the analysts’ estimates by $0.13. The revenue jumped 11.5% year-over-year (YoY) to $5.05 billion, which beat the estimates by $30 million.

30 Wall Street analysts covered Adobe Inc. (NASDAQ:ADBE) over the last three months, and 24 kept a  Buy rating on the stock. At the time of writing on December 19, the average price target of $650.07 represented an upside of 7.01%.

Adobe Inc. (NASDAQ:ADBE) was mentioned in Polen Capital’s third-quarter 2023 investor letter. Here is what it said:

“Both Alphabet and Adobe’s businesses continue to perform well. With respect to Adobe, the most recent quarter delivered more of the same with constant currency revenue growing 13%, margin expansion, and over 2% of shares outstanding repurchased for non-GAAP earnings growth of over 20%. We believe its approach to GenAI through Firefly, which guarantees safe content because it trains on Adobe Stock, will continue to be attractive to enterprises. The counter to GenAI, and something we are keeping an eye on with Alphabet and Adobe, is that it requires heavy investment. While both businesses can leverage their scale and manage costs in other areas, we expect the investment in future growth through GenAI will weigh on company-wide margins over the near term.”

8. Salesforce, Inc. (NYSE:CRM)

Number of Hedge Fund Holders: 122

Salesforce, Inc. (NYSE:CRM) is a cloud-based software company. Its two main AI tools are Salesforce Einstein and Einstein GPT.

On December 18, Wolfe Research analyst Alex Zukin upgraded Salesforce, Inc. (NYSE:CRM)’s stock to an Outperform rating from a Peer Perform rating with a $315 price target. The analyst expects the company to witness double-digit topline growth due to several factors, including AI, pricing, and more.

On November 29, Salesforce, Inc. (NYSE:CRM) announced its Q3 earnings result with a non-GAAP EPS of $2.11, surpassing the estimates by $0.05. The revenue of $8.72 billion grew 11.2% YoY.

Harding Loevner commented on Salesforce, Inc. (NYSE:CRM) in its second-quarter 2023 investor letter. Here is what it said:

“Salesforce, Inc. (NYSE:CRM), a company we’ve owned since 2019, recently added ChatGPT-like capabilities onto its existing Al module, Einstein, to support its internal sales efforts and customer-facing software. For example, Einstein GPT can help generate marketing emails tailored to specific clients by using Salesforce’s customer database and past email correspondence to learn the most effective approach for each client. Einstein GPT is also different from off-the-shelf LLMS in three important ways: It keeps personal identifiable information private and secure, compared with external tools that retain anything a user enters. It employs the latest data in Salesforce’s system, as opposed to the sometimes-stale public data that train generic models. And generative Al capabilities can be integrated with other Salesforce offerings; the company has already introduced Slack GPT and Tableau GPT, Al-equipped versions of its workplace collaboration and analytics tools.”

7. Apple Inc. (NASDAQ:AAPL)

Number of Hedge Fund Holders: 134

Apple Inc. (NASDAQ:AAPL) is one of the biggest tech companies in the world and integrates AI and machine learning in its products and services like Siri, Apple GPT chatbot, etc.

According to Insider Monkey’s database, Apple Inc. (NASDAQ:AAPL) had the highest total hedge fund investments at $179.018 billion, with 134 funds bullish on the stock in the third quarter. Warren Buffett’s Berkshire Hathaway was the most significant stakeholder in the company, with 915.560 million shares worth $156.753 billion, representing 50.03% of the fund’s portfolio.

On December 19, Apple Inc. (NASDAQ:AAPL) reported that it signed a deal with The New York Times Company (NYSE:NYT) to add The Athletic to Apple News+. Eddy Cue, Apple’s senior vice president of services, commented that millions of Apple News+ subscribers will love the addition.

Hayden Capital commented on Apple Inc. (NASDAQ:AAPL) in its third quarter 2023 investor letter. Here is what it said:

“Even Berkshire Hathaway’s most famous investment of the last decade – Apple Inc. (NASDAQ:AAPL) – was based on a similar set up. When Berkshire invested in 2016, Apple’s subscription revenues were just starting to cross ~10% of total revenues. Today, that figure is ~25%.

While operating income has grown +90% from 2016 to 2023, the valuation multiple itself has expanded by ~300%, from ~6x EV/EBIT to ~24x EV/EBIT today.

Investors have evolved their perception of Apple’s products – from that of a “fad” hardware company at risk of competition, to that of a “consumer staple”, a necessary part of a household’s budget…” (Click here to read the full text)

6. Uber Technologies, Inc. (NYSE:UBER)

Number of Hedge Fund Holders: 146

Uber Technologies, Inc. (NYSE:UBER), the famous ride-hailing service provider, has been investing significantly to bring AI to its services. Other than working on its very own AI chatbot, the company is collaborating on autonomous vehicles with Alphabet Inc. (NASDAQ:GOOGL)’s Waymo.

On December 13, JPMorgan raised the price target on Uber Technologies, Inc. (NYSE:UBER)’s stock to $76 from $62 and maintained an Overweight rating. The analyst highlighted the company’s inclusion in the S&P 500 Index, estimated free cash flow of $5.3 billion in 2024, and 

supply tailwinds.

Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and Meta Platforms, Inc. (NASDAQ:META) are some of the most promising AI stocks according to hedge funds besides Uber Technologies, Inc. (NYSE:UBER).

RiverPark Advisors mentioned Uber Technologies, Inc. (NYSE:UBER) in its third quarter 2023 investor letter. Here is what it said:

“Uber Technologies, Inc. (NYSE:UBER): UBER was the top contributor in the quarter following a better-than-expected 2Q23 earnings report and 3Q23 guidance. Gross bookings of $33.6 billion were up 16% year over year. Mobility gross bookings of $17 billion grew 25% over last year driven by a combination of product innovation and driver availability. Delivery gross bookings of $16 billion were up 12% from last year. 2Q Adjusted EBITDA of $916 million, up $552 million year over year, significantly beat Street estimates of $845 million and the company generated $1.1 billion of free cash flow. Management guided to continuing growth in 3Q Gross Bookings (17%-20% growth) and Adjusted EBITDA (of $975-1,025 million).

UBER remains the undisputed global leader in ride sharing, with a greater than 50% share in every major region in which it operates. The company is also a leader in food delivery, where it is number one or two in the more than 25 countries in which it operates. Moreover, after a history of losses, the company is now profitable, delivering expanding margins and substantial free cash flow. We view UBER as more than just ride sharing and food delivery, but also as a global mobility platform with the ability to sell to its 130 million users (by comparison, Amazon Prime has 200 million members) and penetrate new markets of on-demand services, such as package and grocery delivery, travel, and worker staffing for shift work. Given its $4.3 billion of unrestricted cash and $4.4 billion of investments, the company’s enterprise value of $95 billion equates to just over 20x next year’s estimated free cash flow.”

5. NVIDIA Corporation (NASDAQ:NVDA)

Number of Hedge Fund Holders: 180

NVIDIA Corporation (NASDAQ:NVDA) develops and sells computer graphics processors, chipsets, and related multimedia software. With a few AI-integrated solutions and products like NVIDIA AI and HGX H200 under its belt, the company recently announced that it will be unveiling new AI innovations at CES 2024.

34 Wall Street analysts covered NVIDIA Corporation (NASDAQ:NVDA), and 31 kept a Buy rating on the stock. The average price target of $661.35 had an upside of 34.45% at the time of writing on December 19.

On December 11, NVIDIA Corporation (NASDAQ:NVDA)’s CEO Jensen Huang said that the company is interested in setting up a chip production base in Vietnam. The company plans to support the country in advancing its AI ecosystem through talent training and partnering up with local tech firms.

Ave Maria mentioned NVIDIA Corporation (NASDAQ:NVDA) in its third quarter 2023 investor letter. Here is what it said:

“The Fund added two new positions in the quarter. The Fund initiated a position in Apollo, which grew to be 5.9% of the Fund’s assets by the end of the quarter. The Fund also initiated a small position in NVIDIA Corporation (NASDAQ:NVDA), which is the leading manufacturer of graphic processing units that are the computing power behind much of the artificial intelligence industry environment supporting the broader group of energy infrastructure stocks.”

4. Alphabet Inc. (NASDAQ:GOOGL)

Number of Hedge Fund Holders: 221

Alphabet Inc. (NASDAQ:GOOGL) is a holding company and it is focused on innovation through AI, as evident in its AI-focused products and solutions like its chatbot Bard and more. The company’s Class-A shares are represented by the ticker symbol GOOGL.

On December 13, Alphabet Inc. (NASDAQ:GOOGL) launched its Gemini Pro large language model. While the large language model is free for clients as of now, the company mentioned that it plans on it being “competitively priced” later.

On December 13, Alphabet Inc. (NASDAQ:GOOGL)’s Google launched MusicFX as part of its AI Test Kitchen. The AI tool can be used by customers to create music and it utilizes Google’s MusicLM and DeepMind’s watermarking technology and SynthID.

Alphabet Inc. (NASDAQ:GOOGL) was mentioned in White Brook Capital Partners’ third quarter 2023 investor letter. Here is what it said:

“The magnificent seven, that underpin the S&P 500 performance, which includes Alphabet Inc. (NASDAQ:GOOG), now comprise almost 30% of the market capitalization of the S&P500. At least three of the seven stocks have heightened downside risk and suffer from already high penetration, weakening end markets, competitive risk, and lofty valuation. They have been remarkably resilient to increased interest rates and the potential for slowing growth. Small and midcap stocks, on the other hand, have been systemically penalized by fears of recession and continue to price that eventuality even as significantly better outcomes have become more probable. Today, it’s relatively easy to find attractive investments in this segment.”

3. Meta Platforms, Inc. (NASDAQ:META)

Number of Hedge Fund Holders: 234

Meta Platforms, Inc. (NASDAQ:META) is a tech conglomerate and one of the leading companies in today’s AI race with its AI-integrated features in social networking apps, Meta AI, and more.

On December 8, BofA maintained a Buy rating and $384 price target on Meta Platforms, Inc. (NASDAQ:META)’s stock. The firm highlighted the company’s recurring revenue models owing to its AI-focused innovations.

According to Insider Monkey’s database, the hedge fund sentiment was quite positive toward Meta Platforms, Inc. (NASDAQ:META) in Q3. In the quarter, 234 funds were bullish on the stock, up from 225 funds in the previous quarter. Rajiv Jain’s GQG Partners was the most significant investor in the company and increased its stake by 33% to 11.1 million shares worth $3.34 billion.

White Brook Capital Partners commented on Meta Platforms, Inc. (NASDAQ:META) in its third quarter 2023 investor letter. Here is what it said:

“The magnificent seven, that underpin the S&P 500 performance, which includes Meta Platforms, Inc. (NASDAQ:META), now comprise almost 30% of the market capitalization of the S&P500. At least three of the seven stocks have heightened downside risk and suffer from already high penetration, weakening end markets, competitive risk, and lofty valuation. They have been remarkably resilient to increased interest rates and the potential for slowing growth. Small and midcap stocks, on the other hand, have been systemically penalized by fears of recession and continue to price that eventuality even as significantly better outcomes have become more probable. Today, it’s relatively easy to find attractive investments in this segment.”

2. Amazon.com, Inc. (NASDAQ:AMZN)

Number of Hedge Fund Holders: 286

Amazon.com, Inc. (NASDAQ:AMZN) is a Washington-based tech company that is driven to integrate AI in its numerous services and tools like its generative artificial intelligence (AI) powered assistant called Q, Amazon Polly, and more.

On December 18, it was reported that Amazon.com, Inc. (NASDAQ:AMZN) is pushing to obtain more sports media rights by considering investing in Diamond Sports Group. The sports group owns the media rights for several major league baseball teams and several national hockey league teams.

On November 28, Amazon.com, Inc. (NASDAQ:AMZN)’s Amazon Web Services unveiled a new generative artificial intelligence chatbot known as Q.

Amazon.com, Inc. (NASDAQ:AMZN) was mentioned in Polen Capital’s third quarter 2023 investor letter. Here is what it said:

“Amazon continues to showcase its place as one of the most competitively advantaged companies in the world. The company has made significant progress in managing costs and better leveraging existing capacity, driving a strong recovery in its profitability. We think there’s additional room for improvement.

AWS growth seems to be stabilizing even while management continues to work with clients to optimize their infrastructure spend. Roughly 90% of global IT spending remains on premise. We believe this will eventually flip, with most IT spending ultimately moving to the cloud over time. We think AWS will be a significant beneficiary of this transition.

Further, our investment case on company profitability driven by AWS and advertising continues to unfold, delivering nearly $8 billion in free cash flow over the trailing twelve months and a net margin of 5%. We expect both to move higher with the mix shift of more profitable businesses growing fastest continuing to take effect.

At Amazon’s current price, we believe the company is well positioned to deliver a mid-teens or higher total shareholder return for our clients over the next five plus years without a Herculean effort from the business. It simply needs to continue executing on current businesses and growing into the capacity it built during and immediately after the pandemic.”

1. Microsoft Corporation (NASDAQ:MSFT)

Number of Hedge Fund Holders: 306

Microsoft Corporation (NASDAQ:MSFT) is a leading tech company that provides AI-integrated platforms, products, and tools like Azure AI.

On December 19, it was announced that Microsoft Corporation (NASDAQ:MSFT) and ASGN Incorporated (NYSE:ASGN) will be collaborating on NextGen artificial intelligence (AI) technologies, including Copilot for Microsoft 365 and Azure OpenAI Service.

On December 19, it was reported that Microsoft Corporation (NASDAQ:MSFT) and Elevat Inc. entered a technical partnership to bring innovation to the Internet of Things (IoT) landscape through Elevat Machine Connect and Microsoft Azure Edge.

Claret Asset Management mentioned Microsoft Corporation (NASDAQ:MSFT) in its Q3 2023 investor letter. Here is what the firm said:

“We have mentioned in the last letter that the “magnificent seven”, including Microsoft Corporation, dominated the performance of the S&P 500. We might have left you with the feeling that we are bearish because we don’t find the Magnificent 7 attractive. Let us make it clear: we are just not so pessimistic as to believe there are only 7 growth opportunities in the entire global equity market. In fact, we are optimists and think opportunity is abundant. Just not in everyone’s current 7 favorite stocks.”

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Disclosure. None. 11 Most Promising AI Stocks According to Hedge Funds is originally published on Insider Monkey.