With few exceptions over the last three decades, investors have always had a next-big-thing investment trend or innovation to look forward to. But since the advent of the internet in the mid-1990s, other next-big-thing trends have consistently come up short. The rise of artificial intelligence (AI) aims to change that.
In its simplest form, AI relies on software and systems to handle tasks that humans would normally oversee. What gives AI its undeniably lofty ceiling is the ability for these systems to learn and evolve without human intervention over time. Being able to infiltrate almost every sector and industry of the global economy can lead to trillions of dollars in added consumption-side benefits and productivity gains by the end of the decade.
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Although semiconductor stock Nvidia (NVDA -0.79%) has been the most direct beneficiary of the artificial intelligence revolution, it hasn't necessarily been a favorite of Wall Street's brightest and most-successful investors. Based on Form 13Fs filed with the Securities and Exchange Commission that cover trades made during the fourth quarter, billionaire investors were sellers of Nvidia and chose to pile into two fast-growing AI stocks instead.
More than a half-dozen billionaires gave Nvidia the heave-ho
Based solely on Nvidia's headline growth figures, investors would struggle to find any flaws with the company. Sales more than doubled in fiscal 2024 (ended Jan. 28, 2024), with Data Center segment revenue skyrocketing by 217%.
Initial demand for Nvidia's A100 and H100 graphics processing units (GPUs) has been otherworldly, which has resulted in exceptional pricing power for these chips. It's been estimated that Nvidia's GPUs, which are the preferred choice for running generative AI solutions and training large language models, control around a 90% share in high-compute data centers.
However, this didn't stop more than a half-dozen billionaire asset managers from paring down their fund's respective stakes in Nvidia during the December-ended quarter (total shares sold in parenthesis):
- Israel Englander of Millennium Management (1,689,322 shares)
- Jeff Yass of Susquehanna International (1,170,611 shares)
- Steven Cohen of Point72 Asset Management (1,088,821 shares)
- David Tepper of Appaloosa Management (235,000 shares)
- Philippe Laffont of Coatue Management (218,839 shares)
- Chase Coleman of Tiger Global Management (142,900 shares)
- David Siegel and John Overdeck of Two Sigma Investments (30,663 shares)
Following an almost parabolic run higher by Nvidia's stock, these eight prominent billionaires may be counting on history rhyming, once more. Every next-big-thing investment trend or innovation since the mid-1990s has undergone a bubble-bursting event in its early stages of adoption. This is to say that investors have a terrible habit of overestimating the uptake of new technology. It's unlikely that AI breaks this streak, which would leave Nvidia's stock highly vulnerable to downside.
It's also hard to ignore the competitive pressures the company is liable to face in the coming months. Aside from direct external competition from the likes of Intel and Advanced Micro Devices, Nvidia has to cope with the fact that most of the "Magnificent Seven" companies are developing in-house GPUs for their data centers. That's a problem when 40% of Nvidia's net sales come from four members of the Magnificent Seven.
Regulators have put a glass ceiling above Nvidia, as well. Despite its attempts to develop toned-down AI-GPUs for China, U.S. regulators have blocked exports of Nvidia's high-powered GPUs to the world's No. 2 economy by gross domestic product on two separate occasions.
While billionaires were busy showing Nvidia to the door, they were piling into two other rapidly growing AI stocks.
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Intuitive Surgical
The first high-growth artificial intelligence stock that billionaires couldn't stop buying as they were sending shares of Nvidia to the chopping block is robotic-assisted surgical system developer Intuitive Surgical (ISRG -0.32%). During the fourth quarter, a half-dozen billionaires took the plunge, including (total shares purchased in parenthesis):
- Philippe Laffont of Coatue Management (516,054 shares)
- Israel Englander of Millennium Management (327,505 shares)
- Steven Cohen of Point72 Asset Management (301,908 shares)
- Ole Andreas Halvorsen of Viking Global Investors (290,501 shares)
- Ken Griffin of Citadel Advisors (90,072 shares)
- Ken Fisher of Fisher Asset Management (82,975 shares)
Intuitive Surgical is best-known for its multiple generations of da Vinci surgical systems, which assist surgeons with a variety of soft tissue procedures. The company's systems are designed to reduce hospital recovery times and minimize the likelihood of post-procedure complications. The incorporation of AI and machine learning should improve patient care and lead to more informed decision-making.
This is a company that's undeniably enjoying first-mover competitive advantages. Through the end of March, it had nearly 8,900 of its da Vinci systems installed worldwide, which is far more robotic-assisted surgical systems than any of its competitors. Since these systems are pricey, and it takes quite a bit of time to train surgeons to use them, the company tends to keep its customers for a long time.
Another reason Intuitive Surgical has been such a phenomenal investment for so long is its razor-and-blades operating model. Although its da Vinci systems are pricey (often $0.5 million to $2.5 million), they're intricate and costly to build. Where the company generates its juiciest margins is from selling instruments with each procedure, as well as servicing these systems. These higher-margin categories have grown into a larger percentage of total sales over time, allowing earnings per share (EPS) to increase at a faster pace than its sales.
I'd be remiss if I didn't also mention that the company's robotic-assisted surgical systems are still just scratching the surface with regard to their potential. While there are a few soft tissue indications where the da Vinci system dominates, there's a long runway to gain share in general soft tissue and thoracic procedures.
The second rapidly growing artificial intelligence stock billionaires have been piling into as they sell shares of semiconductor titan Nvidia is social media maven Pinterest (PINS 0.27%). Four top-tier billionaire money managers were buyers of Pinterest stock during the fourth quarter, including (total shares purchased in parenthesis):
- David Siegel and John Overdeck of Two Sigma Investments (6,823,828 shares)
- Jeff Yass of Susquehanna International (317,658 shares)
- Israel Englander of Millennium Management (98,282 shares)
Pinterest has been leaning on AI and machine learning tools for years to improve the search functionality on its site and ensure that users are being shown content that's going to keep them engaged. In theory, further investment in AI should help Pinterest funnel users directly to merchants that carry well-liked/in-demand items.
For the March-ended quarter, Pinterest's stand-out number was its monthly active user (MAU) growth. While user growth isn't everything, it marked the first time Pinterest surpassed the half-billion MAU mark. This suggests the platform is resonating with a growing percentage of the global population.
Having 518 million MAUs has its perks on the advertising side, too. Merchants are realizing that Pinterest's MAUs tend to be motivated shoppers. More importantly, there aren't too many social media platforms that can reach 518 million sets of eyeballs. As Pinterest's social media clout grows, so does its ability to command stronger ad-pricing power.
Pinterest's straightforward operating model also provides a competitive advantage relative to most social media platforms. Whereas most social sites rely heavily on likes and data-tracking tools to help advertisers target users with their message(s), Pinterest's entire operating model hinges on its MAUs willingly and freely sharing the things, places, and services that interest them. Even if app developers continue to clamp down on data-tracking tools, this won't be much of a hinderance to Pinterest's platform.
With Pinterest's growth rate reaccelerating, it's easy to see why select billionaires can't get enough of this stock.
