There isn't a hotter next-big-thing trend on Wall Street at the moment than artificial intelligence (AI).
AI describes the use of software and systems to oversee tasks that humans would normally handle. What makes AI so special and universally adaptive is the incorporation of machine learning (ML). With ML, AI-driven software and systems have the ability to learn and evolve over time. It's what gives AI applicability across a wide gamut of sectors and industries, and it's why PwC foresees AI adding $15.7 trillion to global gross domestic product by 2030.
However, not everyone is a fan of artificial intelligence stocks. Based on the latest round of quarterly Form 13F filings, quite a few highly successful, prominent billionaire investors reduced or exited their positions in a handful of high-flying AI stocks.
Image source: Getty Images.
Palantir Technologies
The first supercharged artificial intelligence stock that has billionaires headed for the exit is data-mining company Palantir Technologies (PLTR 3.73%). Palantir's Gotham platform is driven by AI and helps government agencies plan missions and collect/cull data.
The June-ended quarter saw five high-profile billionaire fund managers meaningfully pare down their stakes or lock the proverbial door behind them when they left, including (total shares sold in the second quarter in parenthesis):
- Ken Griffin of Citadel Advisors (3,328,577 shares)
- Philippe Laffont of Coatue Management (2,166,246 shares)
- Israel Englander of Millennium Management (1,567,528 shares)
- Jim Simons of Renaissance Technologies (814,600 shares)
- Jeff Yass of Susquehanna International (754,845 shares)
Citadel and Millennium disposed of the vast majority of their stakes, while Laffont's Coatue completely exited its position in Palantir.
The likeliest reason we've seen a billionaire exodus from Palantir is the company's lofty valuation following a 120% year-to-date gain. With a $30 billion market cap, Palantir is commanding a price-to-sales and price-to-earnings (P/E) multiple, based on Wall Street's 2023 consensus, of 14 and 61, respectively. Considering that Palantir's sales growth has slumped from a consistent 30%-plus each year to an expected 16% in 2023 and 19% in 2024, it's certainly an aggressive valuation.
On the flip side, Palantir Technologies brings a level of irreplaceability to the table that commands a premium valuation. The company's scope of services, which includes Gotham for federal governments, and Foundry, which helps businesses make sense of big data so they can streamline their operations, are example of AI- and cloud-based services that simply can't be matched or replaced at the scale Palantir can offer.
Palantir has also pushed into the profit column using generally accepted accounting principles (GAAP) a little faster than Wall Street had expected. While that may not merit a 120% increase in its share price in 2023, it certainly shows that Palantir is, operationally, moving in the right direction.
CrowdStrike Holdings
A second high-flying AI stock that has billionaires hitting the sell button is cybersecurity company CrowdStrike Holdings (CRWD 2.03%). CrowdStrike's cloud-based Falcon security platform incorporates AI and ML to become more efficient at recognizing and responding to potential threats to end users.
During the second quarter, five top-notch billionaires were sellers of CrowdStrike stock, including (total shares sold in the second quarter in parenthesis):
- Ken Griffin of Citadel Advisors (1,621.686 shares)
- David Siegel and John Overdeck of Two Sigma Investments (259,891 shares)
- Steven Cohen of Point72 Asset Management (134,327 shares)
- Israel Englander of Millennium Management (65,666 shares)
Cohen's fund completely exited its position, while Citadel sold all but 66,199 shares from its stake.
Mirroring Palantir, the likeliest catalyst for this aggressive selling looks to be CrowdStrike's valuation. Based on Wall Street's consensus figures for fiscal 2024 (CrowdStrike's fiscal year ends January 31), CrowdStrike is valued at nearly 13 times sales and 57 times forecast earnings. That's a potentially steep price to pay with numerous economic indicators suggesting a U.S. recession is possible in the coming quarters.
However, an even stronger case can be made for CrowdStrike than Palantir that it deserves every cent of its premium. Despite its software-as-a-service cybersecurity solutions being costlier than some of its competition, CrowdStrike's gross retention has hovered around 98%. In other words, subscribers are willingly paying more for CrowdStrike's top-tier protection.
Furthermore, add-on sales are really powering CrowdStrike's adjusted subscription gross margin. A little over six years ago, a single-digit percentage of its clients had purchased four or more cloud-module subscriptions. As of July 31, 2023, 63% of its clients had purchased five or more cloud-module subscriptions. Not surprisingly, the company's adjusted subscription gross margin has pushed to 80% through the first-half of fiscal 2024.
Suffice it to say, selling CrowdStrike stock could be a decision these five billionaires eventually regret.
A Tesla Model S charging. Image source: Tesla.
Tesla
The third high-flying artificial intelligence stock billionaires have been aggressively selling is electric-vehicle (EV) manufacturer Tesla (TSLA -1.11%). The full self-driving software developed by Tesla and deployed in its EVs utilizes sensors and machine vision cameras to safely navigate traffic, pedestrians, and other obstacles.
Despite Tesla leading the charge on the EV front, five billionaires have been clear-cut sellers of the stock, including (total shares sold in the second quarter in parenthesis):
- Israel Englander of Millennium Management (2,457,514 shares)
- Jim Simons of Renaissance Technologies (1,933,244 shares)
- Jeff Yass of Susquehanna International (759,457 shares)
- Philippe Laffont of Coatue Management (182,113 shares)
- David Tepper of Appaloosa Management (150,000 shares)
Tepper's fund sold its entire stake in Tesla in the June-ended quarter, while Englander's Millennium has just 115,392 shares remaining.
Once again, valuation was probably the front-and-center reason for this billionaire mad-dash to the exit. Whereas most auto stocks trade at a high-single-digit P/E ratio, Tesla is commanding a P/E ratio of 77 this year, assuming it hits Wall Street's earnings per share consensus. Given the company's struggles to expand its business beyond just selling and leasing vehicles, this much of a premium may be unwarranted -- even for the only profitable pure-play EV manufacturer.
But unlike Palantir and CrowdStrike, there are more concerns than just valuation at the moment for Tesla. The price war it kicked off earlier this year is really beginning to sting its operating margin. As CEO Elon Musk noted while taking questions from shareholders during his company's annual shareholder meeting, Tesla's pricing strategy is entirely dictated by demand. Hefty price cuts across all four of the company's models suggest rising inventory and increased competition are genuine concerns.
In my view, Tesla also has a leadership problem. Although Musk is an innovator who's led Tesla to recurring GAAP profits in each of the past three years, he has a terrible habit of overpromising and underdelivering. For example, he's been claiming that full autonomy for his company's EVs is "one year away" for about a decade. These promises have been baked into Tesla's valuation and could very easily be backed out.
Additional selling of Tesla from billionaire investors in the third quarter wouldn't be a surprise.
