Over the last three decades, Wall Street has enjoyed no shortage of next-big-thing investment trends. Following the advent of the internet, a number of game-changing innovations have taken shape, including genome decoding and blockchain technology, to name a few. But there's nothing that's captivated the attention of investors since the internet changed the corporate landscape quite like artificial intelligence (AI).
When describing "AI," I'm talking about the use of software and systems for tasks that would normally be overseen by humans. Machine learning allows these systems to evolve over time without human intervention in order to become more effective at their tasks, or perhaps even learn new tasks.
AI has utility across most sectors and industries, which is probably what led the analysts at PwC to estimate that this innovation would add $15.7 trillion to the global economy by 2030. Big dollar figures like this won't go unnoticed.
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Three top-tier billionaire money managers are selling shares of the AI "infrastructure backbone"
But what might come as something of a shock is that some of Wall Street's most-successful billionaire investors couldn't pare down their funds' stakes quick enough during the December-ended quarter in the "infrastructure backbone" of the AI revolution, Nvidia (NVDA -0.33%).
To be fair, no company has been a greater beneficiary of the rise of artificial intelligence than Nvidia. The company's A100 and H100 graphics processing units (GPUs) are expected to account for around 90% of the GPUs deployed in AI-accelerated data centers this year. In particular, Nvidia's H100 is vital to training large language models and fueling generative AI solutions. In fiscal 2024 (ended Jan. 28, 2024), Nvidia's data center sales rose 217%!
But if investors dig beneath Nvidia's superficial sales growth, they'll find some potential red flags. For example, the lion's share of the company's sales growth last year can be attributed to exceptional pricing power on its GPUs. A limited supply of A100 and H100 chips allowed the company to dramatically raise its sales price on these units. As new competitors enter the space and Nvidia increases its own production, the scarcity of GPUs will taper off. When that happens, Nvidia's pricing power and gross margin won't be nearly as impressive.
An even bigger concern for Nvidia is its revenue concentration. The company's four-largest customers -- Microsoft, Meta Platforms, Amazon, and Alphabet -- collectively account for around 40% of total sales. The issue is that all four of these "Magnificent Seven" members are developing AI chips of their own. Future orders from these four industry leaders are likely to decline in subsequent years.
Lastly, there hasn't been a next-big-thing trend over the last 30 years that didn't undergo an early-stage bubble. This is to say that investors have a consistent habit of overestimating the adoption and/or utility of a next-big-thing trend or innovation. AI is unlikely to be the exception that breaks this unwritten rule.
All told, three prominent billionaire investors pared down their funds' sizable stakes in Nvidia during the fourth quarter, including:
- Israel Englander of Millennium Management: 1,689,322 shares sold.
- Jeff Yass of Susquehanna International: 1,170,611 shares sold.
- Philippe Laffont of Coatue Management: 218,839 shares sold.
Here's what's truly interesting: While these billionaires were busy selling shares of potential AI bubble stock Nvidia, they and their respective investment teams were piling into an assortment of value stocks.
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Israel Englander believes former industry leaders will regain their luster
The December-ended quarter witnessed Englander and his team pare down Millennium's stake in Nvidia by 45%. Rather than shifting this money to other high-growth companies, there was a very clear emphasis placed on purchasing shares of former industry leaders that appear poised for a comeback. Two value stocks this top-tier billionaire piled into include:
- AT&T (T 2.30%): 19,054,972 shares purchased
- Teva Pharmaceutical Industries (TEVA 2.86%): 5,213,050 shares purchased
Telecom stock AT&T was clobbered last year by the combination of higher interest rates and litigation concerns. Most telecom companies are lugging around quite a bit of debt, which means future refinancing and acquisitions could be costlier. Meanwhile, a Wall Street Journal report in July alleged that legacy telecom companies with lead-sheathed cables (like AT&T) in their network could face environmental and health-related liabilities.
Despite these concerns, AT&T has been steadily moving the needle in the right direction thanks to the 5G revolution. Upgrading its wireless network has encouraged consumers to increase their data consumption -- and data happens to be the biggest margin driver of AT&T's wireless division. Further, AT&T has gained at least 1 million net broadband subscribers for six consecutive years.
Brand-name and generic-drug company Teva Pharmaceuticals has been buried under debt following the (in hindsight) overpriced acquisition of Actavis in 2016. It's also dealt with a long list of litigation concerning its role in the opioid crisis.
The good news for Teva is that it settled its opioid litigation with almost every U.S. state last year. With this gray cloud now lifted, the company has turned its attention to selling non-core assets, further reducing its net debt, and refocusing some of its capital on higher-margin novel drug research.
AT&T and Teva are currently valued at respective forward-year earnings multiples of just 7.7 and 5.4.
Jeff Yass expects two top-notch value stocks to bounce back
Highly successful billionaire asset manager Jeff Yass also chose to invest in value stocks while dumping a portion of Susquehanna's stake in AI stock Nvidia. The two exceptionally cheap stocks he and his team purchased include:
Pfizer stock recently hit a 10-year low after warning that COVID-19 sales from its vaccine (Comirnaty) and oral treatment (Paxlovid) would retreat to $8 billion on a combined basis after reaching more than $56 billion in 2022. To boot, the company expects to record a $0.40-per-share charge in 2024 related to its acquisition of cancer drug developer Seagen.
Although Pfizer is navigating its way through some challenges, it's important to recognize that they're all short-term in nature. Pfizer's non-COVID drug sales continue to climb, and it's still generating $8 billion in sales from COVID-19 therapeutics that didn't exist a few years ago. Plus, the addition of Seagen expands Pfizer's cancer-drug pipeline and should provide ample cost savings.
Meanwhile, Alibaba's share price has been held down by China's economy. Though the world's No. 2 economy was expected to quickly bounce back after abandoning strict COVID-19 mitigation measures, supply chain kinks have remained, and growth has been subdued.
Thankfully, Alibaba is China's undisputed leader in both e-commerce and cloud infrastructure services. Taobao and Tmall accounted for almost 51% of China's online retail sales in 2023, per the International Trade Administration. Comparatively, tech-analysis company Canalys pegged Alibaba Cloud as controlling a 34% share of cloud infrastructure services spend in the first quarter of 2023 in China. These segments, coupled with Alibaba's $92 billion in cash, cash equivalents, and various investments, put a healthy floor beneath its shares.
Pfizer and Alibaba ended the trading session on April 3 at respective forward-year earnings multiples of 9.9 and 8.3.
Philippe Laffont sticks with value-driven industry stalwarts
The third prominent billionaire investor who sent Nvidia to the chopping block and purchased value stocks was Philippe Laffont of Coatue Management. Two extremely cheap industry stalwarts Laffont and his team purchased during the fourth quarter are:
- General Motors (GM 0.35%): 1,596,001 shares purchased.
- NextEra Energy (NEE 2.47%): 540,850 shares purchased.
The skepticism surrounding legacy automakers like General Motors ("GM") is that they would be left in the dust by cutting-edge electric vehicle (EV) manufacturers. However, with global EV demand hitting what appears to be a temporary peak, GM's highly profitable internal combustion engine (ICE) lineup is back in focus.
Though EVs should grow into a larger percentage of new vehicle sales in the years to come, GM's highly profitable ICE segment affords the company the ability to spend aggressively or slow production with its EV segment to avoid steep losses or margin degradation. General Motors is also profitable in China, the world's leading auto market.
The largest electric utility by market cap, NextEra Energy, found its stock under pressure in 2023 as short-term Treasury yields soared. Income investors tend to purchase utilities for their low volatility and market-topping yields. But if they can get similar yields with a T-bill, it's utility stocks like NextEra that suffer.
However, this looks to be a temporary swoon for the clear leader in renewable energy capacity. No utility in the world generates more capacity from wind (24 gigawatts (GW)) and solar (7 GW) than NextEra. While these clean-energy projects have, at times, been pricey, they've demonstrably helped to lower electricity-generation costs and led NextEra to annualized adjusted earnings-per-share growth of 10% since 2013.
Shares of GM and NextEra Energy can be purchased for 4.9 and 17 times their respective forward-year earnings.
