You might not realize it, but one of the most important data releases of the quarter occurred roughly two weeks ago. On May 15, institutions with at least $100 million in assets under management were required to file Form 13F with the Securities and Exchange Commission.
In simple terms, a 13F gives investors over-the-shoulder access to Wall Street's brightest investment minds. Though the data can be delayed by more than six weeks, it provides a snapshot of what Wall Street's top investors bought and sold in the latest quarter (in this instance, 13Fs detailed trading activity for the first quarter). These filings can be especially useful in identifying which stocks, sectors, industries, and innovations asset managers are buying into or avoiding.
Image source: Getty Images.
The latest round of 13Fs show that billionaires were busy bees during the first quarter. With the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite pushing to fresh all-time highs, billionaires chose to pile into two hypergrowth stocks. Perhaps the biggest surprise of all is that one of the fastest scaling companies on the planet, artificial intelligence (AI) titan Nvidia (NVDA +1.67%), was given the heave-ho by billionaire investors.
More than a half-dozen billionaires dumped shares of Nvidia
Following the release of its fiscal first-quarter operating results (ended April 28), shares of Nvidia have rocketed higher by 115% on a year-to-date basis, and gained more than $2.2 trillion in market value since the start of 2023. However, this didn't stop eight prominent billionaire investors from heading to the exit during the March-ended quarter (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)
- David Siegel and John Overdeck 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 three likeliest reasons these successful billionaires bid adieu to a portion of their respective Nvidia stakes likely boils down to three factors: history, pricing power, and competition.
With regard to the former, there hasn't been a next-big-thing innovation in three decades where investors didn't overestimate the uptake/adoption of said innovation. Whether it was the internet, business-to-business commerce, genome decoding, nanotechnology, 3D printing, blockchain technology, or the metaverse, investors continually overshoot the when it comes to the adoption or application of new innovations. While artificial intelligence can be wildly successful over the long run, there's a high probability we're witnessing yet another early stage bubble.
Secondly, Nvidia is on the cusp of contending with a surge of hardware competition in high-compute data centers. Intel is readying to release its Gaudi 3 AI-accelerator during the third quarter, while Advanced Micro Devices has been steadily ramping the release of its MI300X graphics processing unit (GPU).
The concern with this external competition is that it'll reduce the scarcity that's helped push the selling price of Nvidia's H100 GPUs into the stratosphere. As the availability of AI-GPUs improves, Nvidia's pricing power should wane. This might explain why Nvidia's fiscal second-quarter guidance calls for its gross margin to contract by 235 to 335 basis points from the sequential first quarter.
Lastly, Nvidia could see increased competition for AI-accelerated data center space from its top customers. Nvidia's four largest customers make up about 40% of its net sales, and they're all currently developing AI-GPUs of their own. Even if these in-house chips are used in a complementary fashion, it potentially marks a top in gross margin and scaling for this $2.6 trillion AI juggernaut.
But while billionaires were selling shares of Nvidia, they were piling into the following two hypergrowth stocks.
Image source: Getty Images.
Okta
The first fast-paced stock that had the undivided attention of billionaire money managers as they were pressing the sell button on Nvidia is cybersecurity company Okta (OKTA +0.46%). Five top-tier billionaires -- six, if you include the recently passed Jim Simons of Renaissance Technologies -- opened or added to their positions in Okta during the March-ended quarter, including (total shares purchased in parenthesis):
- Israel Englander of Millennium Management (278,971 shares)
- David Siegel and John Overdeck of Two Sigma Investments (274,832 shares)
- Ken Griffin of Citadel Advisors (133,918 shares)
- Ray Dalio of Bridgewater Associates (22,996 shares)
Okta endured a challenging end to 2023 after it had to admit that hackers had breached its platform and gained access to sensitive information. It's not uncommon for cybersecurity companies to stumble for a couple of quarters following such an admission. However, billionaires believe there's quite the value proposition with this rapidly growing security company.
What makes Okta tick is its cloud-native, AI and machine learning-driven cybersecurity platform. While it still needs refining (as evidenced by the October breach), a cloud-based, AI-driven identity verification platform has the ability to become more efficient at recognizing and responding to potential threats over time, and is far nimbler than on-premises solutions.
NASDAQ: OKTA
Key Data Points
What billionaires likely appreciate about Okta is its subscription-fueled operating model. Subscriptions generate predictable operating cash flow and high margins quarter after quarter. As of the end of fiscal 2024 (Jan. 31, 2024), Okta had nearly $3.4 billion in remaining performance obligations (essentially its subscription backlog) and enjoyed a gross profit margin of 74.3% for the full year, up 370 basis points from the previous year. As Okta scales, its gross margin should approach 80%.
Furthermore, the company has moved past the high integration costs associated with its 2022 acquisition of Auth0. Buying Auth0 meaningfully expanded Okta's presence in the $30 billion Customer Identity market, and gives the company a clear path to sell its solutions beyond the borders of the U.S.
Over the coming four years, Okta's earnings growth rate could double up its sales growth.
Datadog
The second hypergrowth stock that billionaires couldn't stop buying in the March-ended quarter as they were sending shares of Nvidia to the chopping block is cloud-based observability company Datadog (DDOG +2.54%). Similar to Okta, five billionaires took the plunge in the first quarter, including (total shares purchased in parenthesis):
- Israel Englander of Millennium Management (2,076,411 shares)
- Ken Griffin of Citadel Advisors (2,053,632 shares)
- Steven Cohen of Point72 Asset Management (873,186 shares)
- David Siegel and John Overdeck of Two Sigma Investments (93,409 shares)
NASDAQ: DDOG
Key Data Points
The biggest challenge a company like Datadog has faced over the past year is the prospect of a U.S. recession. A couple of predictive indicators, such as the first decline in M2 money supply since the Great Depression, signal a real likelihood of a recession in the not-too-distant future. It's not uncommon for fast-growing businesses to pare back their capital spending during short-lived economic downturns.
Thankfully, the U.S. economy has remained strong, which has fueled macro and company-specific catalysts for Datadog.
On a macro basis, the permanent shift we've witnessed in the labor force following the COVID-19 pandemic has worked in Datadog's favor. With a hybrid work environment -- i.e., a mix of office-based and mobile employees -- Datadog's platforms are being counted on more than ever to observe and secure data flows and user activity within the cloud.
One of the company's primary growth drivers is enterprise cloud spending. In 2019, approximately 5% of all global information technology (IT) spending was for the cloud. By 2027, closer to 20% of global enterprise IT spending is estimated to be spent on the cloud. Datadog has a sustained double-digit growth runway as businesses ramp their push into the cloud.
