David Tepper isn't as widely known as Warren Buffett. But like Buffett, he ranks as one of the top investors on the planet today.
Tepper runs the global hedge fund Appaloosa Management. He also owns the Carolina Panthers NFL franchise and Major League Soccer's Charlotte Football Club. His net worth stands at $18.5 billion, according to Forbes.
Many retail investors closely follow the stocks that Buffett buys. It could be helpful to pay attention to what Tepper does, too. The billionaire hedge fund manager recently boosted his stake in Nvidia (NVDA 3.17%) by a whopping 580%. Is buying this high-flying AI stock a smart move?
NASDAQ: NVDA
Key Data Points
Loading up on Nvidia
Tepper initiated a new position in Nvidia in the first quarter of 2023. He bought 150,000 shares for Appaloosa's portfolio. At the end of Q1, this position was worth nearly $41.7 million.
Appaloosa's recent 13F filing to the U.S. Securities and Exchange Commission revealed that Tepper loaded up even more on Nvidia during the second quarter. The multibillionaire bought 870,000 additional shares of the graphics chipmaker.
Tepper's hedge fund now owns 1.02 million shares of Nvidia. The stake is worth more than $450 million. That makes Nvidia the largest holding in Appaloosa's portfolio, although it's running neck and neck with Meta Platforms for the top spot.
Why Tepper's move could be a smart one
You don't achieve the level of investing success that Tepper has by blindly chasing momentum. His increased bet on Nvidia could be a smart move for a couple of key reasons.
First, the opportunity for artificial intelligence (AI) is massive. In particular, the flurry in developing generative AI applications has taken the technology world by storm. McKinsey predicts that generative AI alone could boost global corporate profits by as much as $4.4 trillion per year.
Second, Nvidia's graphics processing units (GPUs) are the gold standard in powering AI applications. The expression "selling like hotcakes" might need to be changed to "selling like GPUs." Elon Musk said in Tesla's Q2 conference call last month that the electric vehicle maker would take Nvidia's chips as fast as they could deliver them. He's not alone.
Raymond James analysts recently wrote to clients that the demand for Nvidia's GPUs "is significantly outpacing supply." UBS analyst Timothy Arcuri called Nvidia "a kingmaker" in AI chips and thinks that the supply/demand imbalance will extend at least through next year.
On the other hand...
There's one argument, however, that Tepper shouldn't have loaded up so heavily on Nvidia. All the anticipated growth could already be baked into the share price -- and then some.
Yes, the company's revenue should increase significantly thanks to soaring demand for its chips. The consensus Wall Street estimate projects sales growth of more than 60% this year and close to 35% next year.
But Nvidia's shares trade at 18 times next year's sales, which factors in this impressive growth. That would be a great multiple if we were talking about earnings, but we're not.
In June, valuation expert Aswath Damodaran crunched the numbers for Nvidia. He concluded that a fair current value of the stock based on its revenue growing by 10x by 2033 and Nvidia achieving operating margins of close to 40% was around $240 a share. That's roughly 45% below Nvidia's current share price.
My view is that Nvidia could continue to fly higher, especially if the company hits a home run with its fiscal 2024 Q2 results next week. However, I also think Damodaran's valuation analysis on the stock is more likely right than wrong.
In short: Buying Nvidia could be a smart move in the near term. But any hiccups could cause the stock to plummet.
