Ken Griffin’s Citadel is the most profitable hedge fund in history. As of December 2022, it had earned nearly $66 billion for clients since its inception in 1990, while Ray Dalio’s Bridgewater ranked second with $58 billion in profits. That accomplishment qualifies Griffin as a brilliant investor, and it makes his recent stock purchases particularly noteworthy.
During the second quarter, Griffin tripled his stake in Amazon (AMZN -0.09%) and doubled his stake in Microsoft (MSFT 0.22%), signaling high conviction in two companies that are leaning aggressively into growing demand for artificial intelligence (AI). Indeed, excluding options contracts, Amazon is now his seventh-largest holding, and Microsoft is his largest holding.
Here’s what investors should know.
The artificial intelligence boom could fuel the next bull market
The S&P 500 is just 9% from a record high, meaning the benchmark index is on the brink of bull market territory. That may seem like an arbitrary milestone, but it has big implications for investors. The S&P 500 returned an average of 186% during the last nine bull markets, and the next one could be particularly momentous due to the artificial intelligence (AI) boom.
Wall Street agrees. In fact, Goldman Sachs thinks generative AI could add $7 trillion to the global economy during the next decade, and Ark Invest projects AI software revenue will increase at 42% annually to hit $14 trillion by 2030.
Amazon and Microsoft should benefit greatly from the AI boom, so now is a good time to buy both stocks. Here’s a look at each.
The bull case for Amazon centers on three growth opportunities. The first is e-commerce, a market expected to grow at 8.1% annually through 2030. Amazon runs the most-visited online marketplace in the world, and its immense logistics network gives the company an advantage that would be nearly impossible for any competitor to overcome.
The second opportunity is adtech software, a market expected to grow at 13.7% annually through 2030. Amazon has used its ability to engage shoppers and collect consumer data to become the third-largest digital advertiser in the world, and its ad business should continue to grow quickly for as long as its marketplace remains popular.
The third opportunity is cloud computing, a market expected to grow at 14.1% annually through 2030. Amazon Web Services (AWS) has dominated the cloud infrastructure and platform services (CIPS) market for 12 consecutive years, and part of that success stems from prowess in AI. Indeed, AWS offers the broadest, deepest portfolio of AI and machine learning services in the cloud, and new generative AI products like Amazon Bedrock should add to its momentum.
Amazon has a great shot at achieving revenue growth in the mid-teens through the end of the decade. That makes its current valuation of 2.5 times sales look cheap, especially compared to the three-year average of 3.3 times sales. That’s why this growth stock is a screaming buy.
The bull case for Microsoft centers on two growth opportunities. The first is software-as-a-service (SaaS), a market expected to grow at 13.7% annually through 2030. The Microsoft brand is synonymous with enterprise software — so much so that the company accounted for 16.4% of all SaaS sales last year, meaning it held twice as much market share as its closest competitor.
The second opportunity is cloud computing, a market that, as mentioned, is expected to grow 14.1% annually through 2030. Microsoft Azure is the second-largest CIPS provider worldwide, and it has steadily gained market share in recent years due in large part to strength in hybrid computing, database management systems, and AI supercomputing infrastructure.
Microsoft hopes to turbocharge its enterprise software and cloud computing businesses with generative AI. To that end, the company recently announced Microsoft 365 Copilot and Dynamics 365 Copilot. The former leans on AI to write and edit content in Word, create presentations in PowerPoint, and analyze data in Excel, while the latter leans on AI to improve sales productivity, marketing outcomes, and supply chain management.
In the cloud, Microsoft has partnered with OpenAI to give Azure customers exclusive access to the GPT large language models. Those foundational models are the brains behind viral chatbot ChatGPT, but developers can use them to build their own generative AI software. That is a very compelling reason for businesses to consider Azure; so much so that Morgan Stanley says Microsoft is the software company “best positioned” to monetize generative AI.
Microsoft has a great shot at growing revenue in the mid-teens annually through 2030, given its strong presence in enterprise software and cloud computing, as well as its burgeoning portfolio of AI products. That makes its current valuation of 11.3 times sales look reasonable, and that multiple aligns with the three-year average of 11.4 times sales. Investors should feel comfortable buying a small position in this growth stock today.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon.com. The Motley Fool has positions in and recommends Amazon.com, Goldman Sachs Group, and Microsoft. The Motley Fool has a disclosure policy.