Are you already a successful tech stock investor who manages billions of dollars for yourself and others? If not, there are probably a few things about investing in artificial intelligence (AI) stocks that you could learn from the small group of folks who are.
Gaining insights from the actions of the world's most successful investors is probably easier than you think. The Securities and Exchange Commission makes just about anyone who manages more than $100 million in assets disclose their recent trading activity every three months.
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The latest round of quarterly disclosures just came out, and you might be surprised by which AI stocks billionaires are selling and which ones they're buying.
Surprising AI stock that billionaires are selling: Nvidia
During the final three months of 2023, at least three well-regarded hedge funds each sold more than 1 million shares of Nvidia (NVDA 6.18%). Israel Englander of Millennium Management, Jeff Yass of Susquehanna International, and Steven Cohen of Point72 Asset Management significantly trimmed their long positions in the chip designer.
These billionaires didn't drop Nvidia stock from their portfolios entirely, but it's a relatively small bet for all three. At the end of December, Point72 had the largest Nvidia position -- worth 0.64% of its total portfolio.
Nvidia isn't the only company designing chips that can run accelerated applications. However, it can charge a lot more for its products because new competing chips designed by Advanced Micro Devices and Amazon don't run Nvidia's proprietary CUDA platform.
Significant switching costs could give Nvidia pricing power for years to come. Investors confident the AI revolution will continue driving growth have driven the stock up to a recent valuation of 96 times trailing earnings.
Unfortunately, semiconductor sales are highly cyclical, and when they fall, they tend to fall fast. Hedge fund managers have been selling the stock because they know that much of the 240% gain it accrued over the past year could quickly be wiped away if management delivers discouraging guidance when it reports quarterly results on Wednesday after the markets close.
An AI stock that billionaires keep buying: Alphabet
Millennium Management significantly raised its Alphabet (GOOGL 10.22%) (GOOG 9.96%) stake in the fourth quarter, acquiring 2.4 million of the company's Class A shares. It wasn't alone. Susquehanna International bought nearly 780,000 Class A shares, which come with voting rights and trade at a slightly higher price than the Class C shares.
James Simons and Renaissance Technologies also piled into Google's parent company. In the fourth quarter, Renaissance bought 1.8 million Class A shares and 1.4 million Class C shares.
Why billionaire fund managers are attracted to Alphabet
When OpenAI stunned the world in late 2022 with the launch of ChatGPT, it caught Alphabet by surprise. Alphabet's own chatbot, formerly known as Bard, was downright disappointing by comparison. What many investors don't realize, though, is that Alphabet was an AI-first business for years before anyone heard of ChatGPT.
Alphabet has rebranded Bard as Gemini. With a more comprehensive large language model to work from, Gemini could become as valuable as ChatGPT is for OpenAI and its partner Microsoft. Billionaires aren't betting on Alphabet based on Gemini, though. They like this stock because it can deliver market-beating gains over time even if Gemini is a total flop.
Google's core products such as Search, Android, Chrome, Maps, Gmail, and YouTube have each had more than 1 billion monthly active users for several years. Search, its oldest and arguably most valuable product, still dominates its space with a 91.5% market share.
Microsoft, the world's largest company by market capitalization, has been hurling resources at the Bing search engine since 2009. Even with help from ChatGPT, its share of the global search market was just 3.4% in January.
A good time to follow the billionaires?
Fund managers will be the first to tell individual investors that not every stock pick they make is going to be a winner. Piling into a stock just because a billionaire did can be disastrous to your portfolio, but adding some shares of Alphabet to a diversified portfolio looks like a smart move right now.
At recent prices, you can buy Alphabet's Class A shares for about 20.9 times forward earnings estimates. That is a reasonable price to pay for a business that has grown its earnings per share by 191% over the past five years. Patient investors could realize market-beating gains even if its bottom line grows at half its previous pace.
