David Tepper has developed quite a following on Wall Street. The billionaire heads up Appaloosa Management — the hedge fund he founded back in 1993. He has been called “arguably the greatest hedge fund manager of his generation” by Forbes magazine and has “consistently outperformed his industry peers and the broader global markets since [Appaloosa’s] inception,” according to Carnegie Mellon University.

The results speak for themselves. Over the past three years, Appaloosa has outperformed the S&P 500 by nearly 17%, a remarkable accomplishment considering the macroeconomic downturn that plagued investors during 2022. Given his robust results, Tepper’s stock picks might be worthy of additional review.

Appaloosa’s portfolio is heavily weighted toward artificial intelligence (AI) stocks, with just five companies representing more than 46% of the fund’s holdings to close out the fourth quarter:

• Meta Platforms (META -0.43%): 11.6%
• Microsoft (MSFT -0.32%): 11.3%
• Amazon (AMZN 0.23%): 10.6%
• Nvidia (NVDA 0.35%): 6.9%
• Alphabet (GOOGL -0.09%) (GOOG -0.02%): 5.7%

Keep in mind that hedge funds only report their holdings at the end of each quarter, and while these five stocks combined are largely unchanged compared to the third quarter, there’s been a big shakeup among the holdings.

Image source: Getty Images.

1. Meta Platforms

Meta Platforms continues to be Tepper’s top holding, largely unchanged since the prior quarter. The company’s history of using AI to surface relevant content for users on its social media sites is well documented. Furthermore, as the world’s second-largest digital advertising platform, Meta makes the lion’s share of its revenue from targeted advertising — which is more effective when assisted by AI.

The company isn’t resting on its laurels, recently releasing a suite of AI-powered tools for its advertisers, designed to help better reach their desired audience. Furthermore, its LLaMA AI (Large Language Model Meta AI) has become one of the leading open-source AI models and can be found on each of the major cloud infrastructure platforms — for a price.

Meta gained 172% last year, so even as Tepper decreased his share count by 5%, the stock — as a percentage of his portfolio — is virtually unchanged.

2. Microsoft

Recognizing the vast opportunity ahead, Microsoft was quick off the blocks to integrate generative AI capabilities into its widely used workplace productivity tools and cloud infrastructure platform.

Microsoft’s AI assistant, Copilot, is the standard-bearer for these innovations. Users are rushing to adopt Copilot thanks to its ability to increase user productivity. Several analysts have suggested that Copilot could generate incremental revenue of $100 billion by 2027. Perhaps as importantly, Copilot is having a halo effect on Microsoft’s Azure, which outgrew its cloud infrastructure rivals in the fourth quarter. Furthermore, management credited 6 percentage points of that growth to increasing demand for AI.

Tepper was likely impressed by the company’s strong move in AI and market share gains in the cloud. This gave him an incentive to increase his Microsoft share count by 4%, bringing it to 11.3% of his portfolio. It probably doesn’t hurt that it’s only selling at a slight premium to the overall market — a bargain for potential growth of this magnitude.

3. Amazon

Amazon has a trifecta of successful businesses, including its industry-leading e-commerce and cloud infrastructure operations, as well as the company’s No. 3 digital advertising platform. Amazon has long been at the forefront of AI development, using these sophisticated algorithms to improve its operations, from making product recommendations to scheduling the most efficient delivery routes.

More recently, the company introduced Amazon Rufus, a digital shopping assistant designed to answer product questions, make comparisons, and make recommendations based on specified criteria. Furthermore, Amazon Web Services (AWS) customers have access to all the latest generative AI models, which could reignite the company’s cloud growth.

Tepper obviously sees additional upside, as he increased Appaloosa’s holdings by 5%, bringing Amazon to 10.6% of its total portfolio. And at just 2 times next year’s sales, Amazon stock is a steal.

4. Nvidia

Nvidia is arguably the poster child for the AI revolution, as its graphics processing units (GPUs) are the gold standard not only for gaming, but also for data centers, speeding information through the ether. Their unmatched computational horsepower has given the company a near monopoly on GPUs for both machine learning and data center use cases, with 95% of their respective markets. This supremacy gave the company a leg up in the generative AI market, which it has dominated from the outset.

However, Tepper cut its stake in Nvidia by 23%, knocking it down to 6.9% of Appaloosa’s holdings, from 8.8% in the third quarter. However, Nvidia stock jumped 239% last year, so Tepper likely took the opportunity to lock in some profits.

5. Alphabet

Alphabet’s Google Search acts as a funnel to fuel the company’s industry-leading digital advertising business, which is also fueled by AI. The company was quick out of the gate to develop its generative AI functionality, infusing AI across a broad cross-section of its Android and Google products. Like Amazon and Microsoft, Google is one of the “Big Three” cloud providers, giving it the perfect channel to sell AI products to its cloud customers.

Recent developments include the debut of Gemini AI, which the company calls its “largest and most capable AI model.” Google Cloud’s Vertex AI continues to expand, providing access to 130 foundational AI models, with something to suit every need.

For all its potential, however, Appaloosa sold roughly 16% of its Alphabet holdings last quarter, bringing its stake to 5.7%, down from 7.2%. While Tepper hasn’t addressed the move, it’s likely he saw greater potential opportunities for Microsoft and Amazon.