Nvidia (NVDA 1.56%) has been the hottest stock of the artificial intelligence (AI) boom, jumping more than 500% since the start of 2023, but some of the smartest investors now seem to be changing their tune on the skyrocketing stock.
Billionaire Stanley Druckenmiller, for example, piled into Nvidia when ChatGPT was first launched, but now the Duquesne Capital Management founder thinks the rally has run out of steam.
Druckenmiller, whose hedge fund generated an average annual return of 30% for nearly 30 years, dumped more than 70% of his stake in Nvidia in the first quarter, according to Duquesne's 13-F filing. The AI chip stock fell from his third-largest position to his seventh.
In an interview on CNBC, the famed investor said it was time to take profits, noting: "We've had a hell of a run. A lot of what we recognized has become recognized by the marketplace now." In other words, he believes most of the opportunity in the stock has run its course.
That conclusion makes sense. After all, Nvidia stock has jumped more than 500% since the beginning of 2023 as its revenue and profits have soared. It's now the third-most valuable company in the world behind only Microsoft and Apple, meaning it will be much more difficult for the stock to double from here, at a market cap of $2.2 trillion.
With Nvidia's first-quarter earnings report due out on Wednesday after hours, the stock is likely to swing on Thursday. Let's take a look at what to expect from the earnings report before answering whether investors should follow Druckenmiller and trim some of their Nvidia holdings ahead of the first-quarter update.
Image source: Getty Images.
Will Nvidia dazzle Wall Street again?
Unlike many AI stocks, Nvidia can back up its stock price surge with real skyrocketing growth in its business.
In the fourth quarter, revenue jumped 265% to $22.1 billion, led by 409% growth in its data center segment. Profits jumped even faster as the company continued to see its pricing power expand due to its domination of the market for data center GPUs.
Adjusted net income jumped 491% to $12.8 billion, and its guidance for the first quarter calls for another strong performance, forecasting revenue of around $24 billion, and adjusted net income of $13 billion.
Recently, Nvidia has established a pattern of topping its own guidance, and the company seems likely to do that again. AI peers like Super Micro Computer and Arm Holdings, both of which work closely with Nvidia, posted strong results with accelerating growth in their recent earnings report, though both stocks also sold off on the report as high expectations are now baked into the sector. TSMC also reported strong revenue growth in April, which was also seen as a sign of growing demand for AI chips.
Nvidia seems like a good bet to beat its own guidance again in the first quarter as competition from peers like AMD and Intel has yet to reach scale, and there's ample evidence that demand for its products remains strong. Tesla, in its recent earnings report, said it had installed 35,000 of Nvidia's H100 GPU Superchips, and it expects that number to grow to 85,000 by the end of the year. H100s are reported to cost as much as $40,000, meaning Nvidia could bring $3.4 billion in revenue from Tesla alone this year.
Similarly, Meta Platforms CEO Mark Zuckerberg recently said his company would own billions of dollars' worth of H100s by the end of the year, another sign that big tech companies are in an arms race to stockpile Nvidia's components for the AI revolution.
Based on the evidence, Nvidia's AI leadership remains rock-solid, and overall AI demand continues to grow.
However, stock prices are based on expectations, not just results, and Druckenmiller seems to believe the stock is now fully valued, and its upside potential is more limited.
NASDAQ: NVDA
Key Data Points
Should you sell Nvidia stock before earnings?
If you've held Nvidia stock since the launch of ChatGPT, like Druckenmiller has, taking some profits off the table might be prudent.
However, the stock seems unlikely to experience a sharp pullback on the earnings report, given the strong results from Arm and Supermicro, the AI buildout going on at tech giants like Tesla and Meta, and Nvidia's recent history of beating its guidance.
Nvidia's valuation also looks reasonable at a forward P/E of 37, comparable to Microsoft, even though it's expected to deliver significantly faster growth.
Investors will be keen to see Nvidia's guidance for the second quarter, which will mark the beginning of a deceleration in its year-over-year revenue growth after the boom over the last year.
The biggest risk to Nvidia right now seems to be incoming competition, but there's no sign yet challengers like AMD and Intel will take significant market share from Nvidia.
If the AI chip kingpin can reassure investors that it can continue to generate monopoly like margins in a massive and rapidly growing market, the stock is likely to gain on the report. So despite Druckenmiller's cautiousness, the upside potential for Nvidia stock still outweighs the risk of a drawdown.
