For the better part of three decades, there has been no shortage of next-big-thing investments that have captivated the attention of professional and everyday investors. Since the advent of the internet completely changed the course of business in the mid-1990s, there's nothing that's garnered as much buzz on Wall Street as the artificial intelligence (AI) revolution.
With AI and the incorporation of machine learning (ML), software and systems have the ability to learn over time and become more proficient at their tasks. The broad-reaching scope of AI in virtually every sector and industry is why the analysts at PwC believe it could add more than $15 trillion to global gross domestic product by the turn of the decade.
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Although dozens of stocks have benefited from the AI revolution, none have enjoyed a more direct boost to their sales and bottom line than semiconductor stock Nvidia (NVDA 6.18%).
This "infrastructure backbone" of the AI revolution is on the chopping block by billionaires
In a little more than a year, Nvidia has become what I like to call the "infrastructure backbone" of the AI movement. The company's A100 and H100 graphics processing units (GPUs) have come to dominate high-compute data centers. Though estimates vary, Nvidia's ultra-fast GPUs might account for 90% (or more) of the GPUs deployed in AI-accelerated data centers this year.
This is a company that's also enjoying otherworldly pricing power on its GPUs. With demand overwhelming supply throughout 2023, cost of revenue moved only modestly higher while data center sales more than tripled. This is a pretty clear indication that pricing power is behind much of Nvidia's sales and profit spike.
But not everyone is convinced that Nvidia is headed higher. During the December-ended quarter, eight prominent billionaire investors pared down their stakes in this top-performing megacap, including (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)
One of the primary reasons to be skeptical of Nvidia's phenomenal run-up is that it's been driven by GPU scarcity. With Nvidia set to meaningfully increase its output in the current calendar year, and competitors like Advanced Micro Devices and Intel rolling out advanced AI-GPUs of their own, it's only logical to expect its pricing power to decline.
What's arguably even more concerning is that Nvidia's top four customers by revenue (40% of total sales) are all developing AI-GPUs of their own. This is either going to lessen their future reliance on Nvidia as their in-house data center chips complement what Nvidia produces, or they could phase Nvidia's infrastructure out altogether. Either way, it's a worrisome development for a richly valued stock.
But while billionaires were busy running for the exit from Nvidia, they weren't shy about pressing the buy button on two other hypergrowth AI stocks during the fourth quarter.
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CrowdStrike Holdings
The first high-octane AI growth stock that appeared to whet the whistles of billionaire money managers during the December-ended quarter is cybersecurity company CrowdStrike Holdings (CRWD 2.03%). Four highly successful billionaires added to their funds' respective stakes in CrowdStrike, including (total shares purchased in parenthesis):
- Jeff Yass of Susquehanna International (400,988 shares)
- Jim Simons of Renaissance Technologies (97,900 shares)
- David Siegel and John Overdeck of Two Sigma Investments (91,091 shares)
On a macro basis, the cybersecurity industry has the look of a surefire growth story through at least the remainder of the decade. As businesses continue shifting their data online and into the cloud, third-party providers are being relied on with frequency to protect this information from hackers.
Furthermore, cybersecurity solutions can thrive in any economic climate. A bad day for Wall Street or a rough patch for the U.S. economy doesn't mean a thing to hackers and robots looking to steal sensitive information. Since CrowdStrike is a subscription-driven company that protects end users, it's well-positioned to generate predictable cash flow no matter what's happening with the economy or stock market.
On a more company-specific basis, CrowdStrike brings clearly identifiable competitive advantages to the table for its customers and investors. The company's Falcon security platform is driven by AI and ML. Falcon is overseeing trillions of events each week, which are making it smarter and more effective at recognizing and responding to potential threats.
There are a couple of key performance indicators that demonstrate just how much pull CrowdStrike has with businesses. Even though its platform isn't the cheapest, gross retention rate has been pegged right around 98% for multiple years. Additionally, the company's net retention rate hasn't fallen below 119% in more than five years. This means the company's existing clients are spending at least 19% more on a year-over-year basis.
But the key to CrowdStrike's success has been its ability to upsell existing customers. Whereas a single-digit percentage of its clients seven years ago had purchased four or more cloud module subscriptions, 64% of its customers now have five or more cloud module subscriptions. These add-on sales have lifted its adjusted subscription gross margin to an impressive 80%!
Snowflake
The second hypergrowth artificial intelligence stock that billionaires were buying as they were sending Nvidia to the chopping block during the December-ended quarter is cloud data-warehousing company Snowflake (SNOW 3.69%). Similar to CrowdStrike, four billionaire investors stepped up and added to their funds' stakes, including (total shares purchased in parenthesis):
- Ken Griffin of Citadel Advisors (1,985,426 shares)
- David Siegel and John Overdeck of Two Sigma Investments (1,204,387 shares)
- Israel Englander of Millennium Management (888,047 shares)
There look to be two reasons why billionaire asset managers are choosing to load up on shares of Snowflake: opportunity and competitive edge.
With regard to the former, enterprise cloud spending, and AI solutions/applications within the cloud, are still in their early innings of expansion. Buying shares of Snowflake offers a way for investors to have exposure to the rapid growth in enterprise cloud and AI.
The other reason billionaires likely piled into Snowflake is because of its well-defined competitive advantages. For example, Snowflake's infrastructure is layered atop the leading cloud infrastructure service platforms. While sharing data can be challenging across competing cloud platforms, it's seamless for Snowflake's customers.
Likewise, Snowflake doesn't rely on subscriptions. Rather, it charges customers based on the data they store and the Snowflake Compute Credits they use. This transparent pricing policy really seems to resonate with its users.
The one issue with Snowflake is the company's valuation. Don't get me wrong, CrowdStrike trades at an immense premium, but has seen its sales remain robust. Snowflake's revenue growth has slowed from the triple-digits three years ago to an estimated 22% in the current fiscal year. Snowflake is also valued at 115 times forward-year adjusted earnings, which is an even tougher pill to swallow for a company that's seen its sales growth slow from the triple digits.
Though Snowflake looks to have a bright future, it could take some time before its operating performance grows into its current valuation.
