Since the advent of the internet roughly 30 years ago, there have been no shortage of next-big-thing investment trends and innovations that promised to change the growth arc for corporate America. Unfortunately, none have come close to their billed expectations. However, artificial intelligence (AI) appears ready to give the internet revolution a run for its money.
AI involves the use of software and systems in place of humans. In many instances, these systems have the ability to learn and evolve without human intervention. AI-driven software and systems becoming more proficient at their tasks, or perhaps even learning new tasks, gives the technology utility across almost every sector and industry. It's the driving force behind PwC's otherworldly estimation that AI can add $15.7 trillion to the global economy by 2030.
However, not all of Wall Street's brightest investment minds are in agreement on how best to play the AI revolution. Although no company has benefited more directly from the rise of AI than semiconductor behemoth Nvidia (NVDA +1.73%), the latest round of Form 13F filings that details trading activity during the March-ended quarter shows billionaires were, once again, headed for the exit.
Image source: Getty Images.
Eight billionaire investors ran for the exit from Nvidia during the first quarter
Nvidia, which is set to report its latest quarterly operating results on Wednesday, May 22, has undeniably benefited from the buzz surrounding artificial intelligence. The company's graphics processing units (GPUs) have become the standard in high-compute data centers. More specifically, the H100 GPU is the go-to for businesses looking to train large language models and operate generative AI solutions.
Last year (Nvidia's fiscal year ended on January 28), this surge in demand for AI-GPUs more than doubled the company's full-year sales and sent Data Center segment revenue screaming higher by 217%.
What's particularly interesting about Nvidia's growth in fiscal 2024 is that it was predominantly driven by the company's phenomenal pricing power on its AI chips. With demand overwhelming supply, Nvidia had no trouble increasing the price of its top-selling GPUs.
Despite these catalysts, eight billionaire money managers -- technically nine if you include recently passed billionaire Jim Simons who founded Renaissance Technologies -- were sellers of Nvidia stock in the first quarter, including (total shares sold in parenthesis):
- Philippe Laffont of Coatue Management (2,937,060 shares)
- Ken Griffin of Citadel Advisors (2,462,716 shares)
- Israel Englander of Millennium Management (720,004 shares)
- Stanley Druckenmiller of Duquesne Family Office (441,551 shares)
- John Overdeck and David Siegel of Two Sigma Investments (420,801 shares)
- David Tepper of Appaloosa Management (348,000 shares)
- Steven Cohen of Point72 Asset Management (304,505 shares)
NASDAQ: NVDA
Key Data Points
The primary reason these billionaires continued to show Nvidia shares to the door might very well be history. There hasn't been a single next-big-thing trend or innovation for three decades that didn't work its way through an early innings bubble. Investors often overestimate the adoption/uptake of new technologies, leading to bubbles. There isn't a stock that would be hurt more in the short run by the AI bubble bursting than Nvidia.
These more than half-dozen billionaire asset managers are likely also thinking about how competition will adversely impact Nvidia. Both Intel and Advanced Micro Devices have introduced AI-accelerating GPUs that'll go to head-to-head with Nvidia's H100 in high-compute data centers.
But the bigger concern might be the competition Nvidia is facing from within. Its four top customers -- Microsoft, Meta Platforms, Amazon, and Alphabet -- make up about 40% of its net sales. But all four of these industry leaders are currently developing AI chips of their own. Even if these chips are purely to complement Nvidia's H100 GPUs, it means reduced orders after the current year.
Lastly, increased competition will reduce the AI-GPU scarcity that's allowed Nvidia to raise its prices into the stratosphere. As its pricing power declines, so should its gross margin.
Yet not every AI stock found itself on the chopping block by Wall Street's smartest money managers in the first quarter. The following two supercharged artificial intelligence growth stocks were popular buys.
Image source: Getty Images.
CrowdStrike Holdings
The first AI stock that whet the whistle of Wall Street billionaires as they were dumping shares of Nvidia in the March-ended quarter is cybersecurity juggernaut CrowdStrike Holdings (CRWD +4.33%). Four prominent billionaires upped their positions in the latest quarter, including (total shares purchased in parenthesis):
- Ken Griffin of Citadel Advisors (706,283 shares)
- Israel Englander of Millennium Management (297,097 shares)
- John Overdeck and David Siegel of Two Sigma Investments (154,688 shares)
The great thing about cybersecurity is that it's steadily evolved into a basic necessity service. Businesses of any size that have an online or cloud-based presence require protection at all times from robots and hackers that seek to steal their sensitive information. Subscription-driven third-party cybersecurity solution providers like CrowdStrike are finding their services in high demand.
The secret sauce that makes CrowdStrike tick is its Falcon security platform. Falcon is cloud-native, reliant on AI and machine learning, and oversees trillions of events each week. This is to say that it's becoming more efficient at recognizing and responding to potential threats over time.
NASDAQ: CRWD
Key Data Points
The testament to this efficacy can be seen in its gross retention rate. Despite not being the cheapest endpoint security provider by any measure, gross retention has increased from below 94% to a pretty consistent 98% in less than seven years. Businesses have demonstrated a willingness to pay more for a product that's successfully defending against breaches.
Furthermore, CrowdStrike's existing clients are spending more with the company as they grow. In fiscal 2017, a single-digit percentage of its customers had purchased four or more cloud-module subscriptions. As of Jan. 31, 2024, the end of the company's latest fiscal year, 64% of its customers had adopted five or more cloud modules. These add-on sales are rapidly pushing the company toward its operating model goal of an adjusted subscription gross margin of 82% to 85%.
Palantir Technologies
A second supercharged artificial intelligence growth stock that billionaires were buying as they reduced their respective stakes in Nvidia is data-mining specialist Palantir Technologies (PLTR +0.55%). Newly filed 13Fs show that five successful billionaires purchased shares of Palantir in the quarter ended in March, including (total shares purchased in parenthesis):
- John Overdeck and David Siegel of Two Sigma Investments (3,216,525 shares)
- Philippe Laffont of Coatue Management (1,368,832 shares)
- Stanley Druckenmiller of Duquesne Family Office (769,965 shares)
- Israel Englander of Millennium Management (481,634 shares)
NASDAQ: PLTR
Key Data Points
One of the main reasons billionaires have been attracted to Palantir is its unique operating model. The company's AI-driven Gotham platform helps federal governments collect data and plan missions, among other tasks. Meanwhile, the more recently launched Foundry platform is geared at helping larger businesses make sense of their big data in order to streamline their operations. At scale, no company comes close to doing what Palantir can. On Wall Street, irreplaceability can be quite valuable.
For years, Palantir's Gotham platform was responsible for much of its growth. Government contracts are typically spread out over four of five years, which leads to highly predictable cash flow. But this is a segment with a ceiling. In other words, there are certain countries (e.g., China) that Palantir's management would never allow access to Gotham.
Although it's still relatively early in its launch phase, Foundry is on track to be Palantir's long-term breadwinner. Palantir closed out the first quarter with 427 commercial customers, which represents a 53% improvement over the year-ago quarter. U.S. commercial customer count growth was even faster (up 69% year-over-year to 262). As Palantir lands larger businesses with Foundry, it should see its cash flow meaningfully expand.
The final selling point for billionaires with Palantir is its balance sheet. The company closed out March with nearly $3.9 billion in combined cash, cash equivalents, and marketable securities, with no debt. It's a company that's ready for whatever the U.S. and global economy throws its way.
