In case you missed it, last week marked one of the most important data releases of the year. Wednesday, Feb. 14, was the last day for institutional investors with at least $100 million in assets under management to file Form 13F with the Securities and Exchange Commission.
A 13F provides investors with a detailed snapshot of what Wall Street's top money managers bought and sold in the most recent quarter (in this case, the December-ended quarter). Despite being up to 45 days old when filed, 13Fs can still offer clear clues as to what stocks, industries, and trends are garnering the attention of asset managers.
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For more than a year, no trend has been captivating the attention of investors and professional money managers quite like artificial intelligence (AI). Broadly speaking, AI involves the use of software and systems to oversee tasks typically given to humans. With the incorporation of machine learning, these software and systems are able to learn and evolve over time, thereby becoming more effective at their tasks.
What's made AI such a thrilling investment thesis is that virtually all sectors and industries can benefit from the technology. Based on a May 2023 report from PwC, AI could add $15.7 trillion to worldwide gross domestic product by 2030.
Although many of Wall Street's smartest, most successful money managers thrived by holding stakes in AI stocks throughout most of 2023, the latest round of 13Fs shows that a number of billionaires sold their stakes in a few high-flying AI stocks way too soon.
Nvidia
The first artificial intelligence stock that's made billionaire money managers regret their decision to sell is none other than the infrastructure backbone of the AI movement, Nvidia (NVDA 6.18%). During the fourth quarter, eight prominent billionaires lightened their fund's stakes, including (total shares sold in parentheses):
- 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)
Through the closing bell on Feb. 16, Nvidia has gained nearly 47%, or almost $231 per share, on a year-to-date basis. This means Englander's fund has left at least $390 million on the table this year, if not more, depending on when Millennium Management exited its close to 1.69 million shares.
The two factors that have powered Nvidia higher are its innovation and pricing power. With regard to the former, the company's A100 and H100 graphics processing units (GPUs) have demonstrated incredible speed and efficiency in AI-accelerated data centers. Many of the largest AI players, which include Microsoft and Meta Platforms, have placed big orders for Nvidia's GPUs.
The second factor -- Nvidia's exceptional pricing power -- is the result of its GPUs being in high demand. When the demand for a product is high but supply is constrained, the price of said product will increase until demand levels out. The fact that Nvidia's cost of revenue moved only modestly higher through the first nine months of fiscal 2024 (ended in January 2024) while companywide sales jumped by 86% demonstrates that Nvidia's pricing power is doing the heavy lifting.
What'll be interesting in 2024 is whether Nvidia can sustain its stellar results. An increase in GPU production threatens to cannibalize its own pricing power. Meanwhile, external and internal competitors are gathering at the proverbial gate to challenge Nvidia.
Super Micro Computer
A second AI stock that likely has billionaires kicking themselves because they sold way too soon is server and storage company Super Micro Computer (SMCI 8.89%). During the December-ended quarter, four prominent billionaires sold shares, including (total shares sold in parentheses):
- Steven Cohen of Point72 Asset Management (255,383 shares)
- Ken Griffin of Citadel Advisors (144,833 shares)
- Israel Englander of Millennium Management (93,827 shares)
- Jeff Yass of Susquehanna International (72,237 shares)
In less than seven weeks since the year began, Super Micro's shares have catapulted higher by 183%, or about $519 per share. They're also up by a jaw-dropping 878% since the start of 2023. For Steven Cohen's Point72, it means leaving more than $132 million on the table in under two months.
What's made Super Micro such a hot commodity for AI investors is the customizable rack-scale servers it's supplying to businesses operating AI-accelerated data centers. Since Super Micro's rack-scale servers use Nvidia's top-notch GPUs, it's somewhat linked Super Micro's success to that of Nvidia. When one moves higher, so has the other.
Although Cohen, Griffin, Englander, and Yass may be sore that they missed out on some historic gains to begin 2024, their exit may ultimately prove prudent. Historically speaking, every next-big-thing trend for the past three decades has endured an early-stage bubble. In fact, Super Micro fizzled out years earlier when growth expectations for the company during the cloud boom failed to materialize. If history is right, AI demand won't come anywhere close to matching investors' otherworldly expectations for the technology -- at least in the early going.
The other problem for Super Micro Computer is that it's entirely dependent on its suppliers, which includes Nvidia. As long as the supply of Nvidia's high-powered GPUs remains constrained, it'll be difficult for Super Micro to max out its own demand.
Image source: Getty Images.
Arm Holdings
The third AI stock billionaires sold way too early, based on the latest round of 13F filings, is semiconductor microprocessor intellectual property giant Arm Holdings (ARM 4.11%), which went public in mid-September. During the fourth quarter, six billionaire money managers parted ways with their respective fund's shares, including (total shares sold in parentheses):
- Ken Griffin of Citadel Advisors (2,086,848 shares)
- Paul Singer of Elliott Investment Management (980,392 shares)
- Ole Andreas Halvorsen of Viking Global Investors (600,000 shares)
- Steven Cohen of Point72 Asset Management (318,189 shares)
- Israel Englander of Millennial Management (51,007 shares)
- Jeff Yass of Susquehanna International (14,843 shares)
On a year-to-date basis, shares of ARM have galloped higher by roughly 71%, or a little more than $53 per share, as of the closing bell on Feb. 16. This means Ken Griffin and his team have missed out on $111 million in respective gains since the year began.
Arm Holdings generates all of its revenue from royalties and licensing. It designs central processing units (CPUs), and major chip companies pay Arm for the right to use its designs. It's a fantastic gig that generates incredibly high margins. A number of major AI players, including Nvidia (which has invested directly in Arm) and Microsoft, are utilizing Arm designs in their processing chips designed for AI servers.
While Arm's blowout fiscal third-quarter operating results (ended Dec. 31) dazzled Wall Street, these six billionaires may not be hurting for long. That's because Arm's valuation could be a tough pill to swallow for investors.
Although the company's profit forecast received a nice boost and its adjusted earnings per share (EPS) blew past consensus expectations, Arm's generally accepted accounted principles (GAAP) profit, which gives you the numbers that really matter, showed a 52% drop in net income to $87 million. Even on an adjusted basis, Arm is trading at 105 times the midpoint of its EPS forecast for fiscal 2024 and more than 41 times the midpoint of its sales forecast.
Despite its juiced-up margins, Arm stock has all the hallmarks of being in an unsustainable bubble.
