Billionaire Dan Loeb Has 27% of His Third Point Portfolio in 3 Brilliant “Magnificent Seven” Stocks, but Completely Sold Out of Another

Daniel Loeb is something of an iconic figure in the annals of Wall Street. The billionaire is CEO of Third Point, the hedge fund he founded in 1995. Loeb secured his place in investor history by starting Third Point with just $3 million in seed money — collected from family and friends — and parlaying that into a $6 billion financial empire. In 2022, Loeb made the list of the “Best Hedge Fund Managers of All Time.”

So when Loeb talks, Wall Street listens.

Over the past year, Loeb’s Third Point’s holdings have been heavily weighted toward the so-called “Magnificent Seven” stocks. The common thread that unites these industry leaders is artificial intelligence (AI). They were also all among the top performers in the Nasdaq Composite last year:

• Nvidia: up 239%.
• Meta Platforms (META 2.48%): up 194%.
• Tesla: up 102%.
• Amazon (AMZN 0.83%): up 81%.
• Alphabet (GOOGL -0.95%) (GOOG -1.22%): up 58%.
• Microsoft (MSFT 0.45%): up 57%.
• Apple: up 48%.

Image source: Getty Images.

Loeb has made no bones about the onset of generative AI, calling it “transformative” and saying “profound economic upheaval” coming. “We believe generative and other forms of AI could compare to the Industrial Revolution but compressed into a period of months and years rather than decades,” he said.

Let’s look at which Magnificent Seven stocks dominated his portfolio in the fourth quarter and which one he sold completely out of.

1. Microsoft: 11.5% of holdings

Microsoft earned its place on Loeb’s list thanks to a quick pivot to embrace AI. The company integrated AI functionality across a broad cross-section of its existing products and services. However, the biggest potential opportunity comes from its AI assistant, Copilot, which helps streamline and automate a variety of tasks, significantly enhancing worker productivity. Demand for the product has been robust.

Loeb has minced no words about its potential. “Microsoft’s introduction of its AI-assisted Office Copilot software … could increase its revenues by as much as $25 billion or more on software sales alone.”

It’s worth noting that Loeb trimmed his position in Microsoft by more than 9% during the quarter — but the position is actually larger than when the quarter began. Why? The stock jumped 19% during the fourth quarter, so even as Loeb took a little off the top, the total value of his Microsoft holdings grew.

At 34 times forward earnings, Microsoft might seem a little pricey, but given its pole position in AI, it’s deserving of a premium.

2. Amazon: 9.7% of holdings

Loeb’s stake in Amazon shouldn’t be a surprise, as he’s held the position for years. In early 2022, when the company’s market cap was $1.6 trillion, Loeb stated that he believed there was more than $1 trillion in “untapped value” in Amazon. He estimates that its online retail business was worth more than $1 trillion alone, while its cloud infrastructure business — Amazon Web Services (AWS) — was worth more than $1.5 trillion.

Furthermore, Loeb has argued that “the most direct consequence” of the accelerating adoption of generative AI is that it “will drive faster revenue growth” for cloud infrastructure services providers — including Microsoft Azure, AWS, and Google Cloud. He went on to say that such services “are the ‘picks and shovels’ of the AI gold rush and should benefit” no matter who wins the AI revolution.

Loeb trimmed his Amazon holdings by about 10% during the fourth quarter, but — as with Microsoft — the value of the position increased. This was thanks to Amazon’s stock price gains of 20% during the fourth quarter.

However, at less than 3 times forward sales, Amazon is still very much a bargain.

3. Meta Platforms: 6.2% of holdings

In keeping with Loeb’s big bets on the Magnificent Seven and AI, he established a sizable position in Meta Platforms in the third quarter and added again in Q4. Meta’s ties to AI are well established, as the company has long used these advanced algorithms to help target its advertising while surfacing relevant content for users on its various social media sites. Furthermore, the recovery of the advertising market is still ongoing, representing additional upside potential for Meta.

There’s also Meta’s foray into generative AI with its Large Language Model Meta AI, which is available on all the major cloud platforms. This represents a new source of revenue for the company.

While he hasn’t explained his reasoning, Loeb obviously believes the stock is still a good value. While not addressing Meta specifically, Loeb’s penchant for “high-quality companies trading at reasonable valuations” is well documented. Indeed, Meta Platforms stock was selling for 24 times earnings to close out 2023, a discount to the S&P 500, with a price-to-earnings ratio of 28.

4. Alphabet: 0% of holdings

Loeb closed out of his entire position in Alphabet, selling all 900,000 shares of Class A stock valued at roughly $125 million at the end of the quarter. Loeb has been mum as to his mindset, but broader portfolio shifts might provide some insight. In addition to Alphabet and trimming his Microsoft and Amazon holdings, Loeb significantly reduced his stake in other technology stocks, including Taiwan Semiconductor, Intercontinental Exchange, and Uber, among others. At the same time, the billionaire investor initiated positions in several utilities, including Verizon and Vistra, while increasing his stake in Pacific Gas & Electric. This suggests Loeb was rebalancing his portfolio and saw greater opportunities in utility stocks, particularly given the epic run in tech stocks over the past year.

To be clear, I believe Loeb made a mistake selling out of Alphabet. It stands to benefit from the advertising rebound and the same AI tailwinds that will drive the other Magnificent Seven stocks higher. Furthermore Alphabet is selling at just 24 times earnings, a fair discount to the market.