The last 18 months have been very good for Nvidia (NVDA -1.99%).
The exploding demand for artificial intelligence (AI) applications since the launch of ChatGPT has pushed big tech companies to snap up Nvidia's GPUs as fast as it can make them. That's led to a huge rise in revenue and earnings for the chipmaker, and a commensurate increase in Nvidia's stock price. Shares are up 425% since ChatGPT's launch on November 30, 2022.
But some of the most influential members of the stock market think Nvidia's run may be overdone. Members of Congress and hedge fund billionaires alike are selling shares of Nvidia and buying two other AI stocks that may have more upside left in them. Should you follow the smart money and drop Nvidia stock?
Image source: Nvidia.
Who's selling Nvidia and why?
Nvidia has seen a host of sellers on Capitol Hill and Wall Street.
Members of Congress selling the stock since last October include:
- Michael McCaul, Republican Representative from Texas
- John Curtis, Republican Representative from Utah
- Ro Khanna, Democrat Representative from California
- Josh Gottheimer, Democrat Representative from New Jersey
- Dan Meuser, Republican Representative from Pennsylvania
- Tom Suozzi, Democrat Representative from New York
- Dan Newhouse, Republican Representative from Washington
Eight prominent billionaires also pared down their positions in Nvidia, according to their most recent filings with the SEC:
- Israel Englander, Millennium Management (1,689,322 shares sold)
- Jeff Yass, Susquehanna International (1,170,611 shares sold)
- Steven Cohen, Point72 Asset Management (1,088,821 shares sold)
- David Tepper, Appaloosa Management (235,000 shares sold)
- Philippe Laffont, Coatue Management (218,839 share sold)
- Chase Coleman, Tiger Global Management (142,900 shares sold)
- John Overdeck and David Siegel, Two Sigma Investments (30,663 shares sold)
To be sure, most of these smart money investors aren't completely disposing of their positions in Nvidia. But they are trimming their stakes by a significant amount. And it may be more than just profit taking after Nvidia's incredible price performance.
There are reasons to believe Nvidia's future isn't as bright as its recent past. For one, the stock valuation remains lofty. Shares trade for over 35x forward earnings expectations. And while Nvidia should see strong demand for the next year or two thanks to several big customers, it's not clear it can sustainably grow earnings at such a rapid pace long-term.
Management pointed out in its 10-K that one of its customers accounted for 13% of its revenue in fiscal 2024. The concentration of its customer base is a big risk, especially as Nvidia's biggest customers actively working to develop alternative chip designs for their own use. One of Nvidia's biggest advantages right now is its existing relationship with Taiwan Semiconductor Manufacturing, the leading chip fabricator in the world. As more competing chips go into full-scale manufacturing, demand for Nvidia's chips will fall.
The AI chip stock smart money is buying instead
While investors on Capitol Hill and Wall Street shed their positions in Nvidia, they've put more of their money into one of Nvidia's biggest rivals in GPU chip design Advanced Micro Devices (AMD 1.14%).
Here are the members of Congress buying shares of AMD:
- Michael McCaul, Republican Representative from Texas
- Josh Gottheimer, Democrat Representative from New Jersey
- Markwayne Mullin, Republican Representative from Oklahoma
And the most prominent billionaires adding AMD to their portfolios:
- Ole Andreas Halvorsen, Viking Global (4,737,399 shares added)
- Ken Griffin, Citadel Advisors (3,506,881 shares added)
- Ken Fisher, Fisher Asset Management (570,035 shares added)
- Philippe Laffont, Coatue Management (23,383 shares added)
AMD has struggled to make progress against Nvidia in its data center GPUs, which are used to train AI models, but that could change soon. It released the MI300X AI accelerator and Instinct MI300A accelerated processing unit in December last year. Still, management's second-quarter sales outlook disappointed investors when it released its first-quarter earnings.
Nonetheless, AMD appears poised to grow its share of the AI GPU market over the long run since it's just getting started. And it may have a much bigger opportunity as more companies invest in inference chips. Those are chips needed to actually use AI models after they're trained. The ability to run an AI application on a local device like on a car's computer, for example, is going to be increasingly common. AMD already has several strong relationships with manufacturers there.
AMD's stock isn't cheap, though. Shares trade for an even higher multiple than Nvidia at a forward PE of 41.3x. AMD faces some of the same challenges as Nvidia in ensuring long-term demand for its data center chips. However, its position in the PC marketplace is stable and could present an opportunity as more inference chips come into demand. Importantly, AMD's growth story may just be getting started, while growth may have peaked at Nvidia.
Smart money is moving up the AI food chain
If there's one company that's benefited nearly as much as Nvidia amid this AI boom, it's Microsoft (MSFT -0.18%). Since making a $10 billion investment in OpenAI at the start of 2023, Microsoft has positioned itself as a leader in the AI space. Both its enterprise software and its Azure cloud computing platform have benefited as a result.
Members of Congress and Wall Street have noticed. The following representatives have all bought shares recently:
- Josh Gottheimer, Democrat Representative from New Jersey
- Pete Sessions, Republican Representative from Texas
- Kathy Manning, Democrat Representative from North Carolina
- Bill Keating, Democrat Representative from Massachusetts
At the same time, these Wall Street billionaires added to their positions in the fourth quarter:
- Ken Fisher, Fisher Asset Management (403,409 shares added)
- Stanley Druckenmiller, Duquesne Family Office (68,860 shares added)
- David Tepper, Appaloosa Management (65,000 shares added)
Microsoft is seeing continued demand for its AI services. Its cloud computing division, Azure, saw sales grow 31% last quarter, far faster than its biggest rivals. Management said growth was driven by demand for AI. In fact, it said, "near-term AI demand is a bit higher than our available capacity."
Microsoft is also seeing strong demand for its Copilot software, which uses generative AI to improve productivity across various fields. As a leader in enterprise software, it sits in an excellent position to sell more subscriptions to its AI software.
Microsoft's forward PE of 29.8x is still a premium to the overall market. But it's largely in the driver's seat when it comes to its position. No office manager is going to switch from Microsoft's software. Few developers are going to migrate from Azure. Switching costs are high, keeping customers locked in place. That makes Microsoft worthy of the smart money, and perhaps worthy of your money as well.
