You might not realize it, but one of the most important data releases of the entire quarter occurred three weeks ago. During the heart of earnings season, and following the eagerly awaited April inflation report, institutions with $100 million in assets under management filed Form 13F with the Securities and Exchange Commission.
In simple terms, a 13F provides an over-the-shoulder snapshot of what Wall Street's smartest and most-successful investors bought and sold in the most recent quarter. In this instance, it covered trading activity during the March-ended quarter. Even though these snapshots are backward looking, they can offer valuable insight into what stocks, industries, and trends are piquing the interest of Wall Street's top investors.
One theme that's definitely stood out for more than a year has been Wall Street's love for almost anything involved in the artificial intelligence (AI) revolution. Using software and systems in place of humans, and giving these systems the ability to evolve over time without human intervention, provides AI with multitrillion-dollar utility in virtually all sectors and industries.
Image source: Getty Images.
But what's interesting about this affinity for AI stocks is that the face of the AI revolution has been sent to the chopping block for two consecutive quarters by billionaire investors. At the same time, we've seen billionaires repeatedly pile into another "Magnificent Seven" stock with abundant long-term potential.
Over a half-dozen billionaires are dumping Nvidia stock
Although artificial intelligence might be the hottest innovation since the advent of the internet in the mid-1990s, it didn't stop more than a half-dozen billionaire money managers from casting aside shares of the infrastructure backbone of the AI movement during the March-ended quarter. Eight billionaire investors -- nine if you include the recently passed Jim Simons of Renaissance Technologies -- sent shares of Nvidia (NVDA +4.39%) packing, 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)
There's no denying that Nvidia has taken advantage of its AI-driven opportunity. The company's graphics processing units (GPUs) are the preferred choice in high-compute data centers, and it's enjoying otherworldly pricing power on these chips as a result. Nvidia's gross margin came in at a scorching-hot 78.4% during its fiscal first quarter (ended April 28).
NASDAQ: NVDA
Key Data Points
Nevertheless, there are four very clear reasons for billionaire investors to be skeptical of Nvidia moving forward.
Perhaps the most obvious is that history has been unkind to next-big-thing innovations over the last three decades. Without fail, investors have overestimated the uptake/adoption of every new innovation, and AI is unlikely to break this trend. If the AI bubble bursts, the company that most-directly benefited from its rise (Nvidia) would be the likeliest to deflate.
The second issue is that Nvidia's pricing power on its GPUs is likely to wane in the quarters to come. Competitors are rolling out GPUs designed to train large language models and oversee generative AI solutions in AI-accelerated data centers. Even if Nvidia's H100 GPUs retain a compute edge over its competitors, the increased availability of new GPUs will lessen the scarcity that sent Nvidia's pricing power into the stratosphere. When this pricing power fades, so will Nvidia's gross margin.
Tight domestic regulation on AI solutions is another concern. In each of the last two years, U.S. regulators have restricted what AI chips Nvidia can export to China, the world's No. 2 economy by gross domestic product. Nvidia even developed toned-down AI-GPUs (the A800 and H800) specifically for China following the first round of export restrictions in 2022, only to have these chips also banned for export to China last year. Sans China, Nvidia is missing out on billions of dollars in potential quarterly revenue.
The fourth and final puzzle piece that may have encouraged billionaires to ring the register is an increasing amount of internal competition. Nvidia's top four customers account for roughly 40% of its net sales. The problem is that they're all developing in-house AI-GPUs of their own. Regardless of whether these internally developed chips are to complement Nvidia's H100 GPUs or to replace them entirely, we're likely witnessing a peak in orders from these industry-leading businesses.
Image source: Getty Images.
This Magnificent Seven stock has been the apple of billionaires' eyes
Since the curtain opened on 2023, the Magnificent Seven stocks have been widely credited with sending Wall Street's major stocks indexes to record-closing highs. The Magnificent Seven are some of the largest (by market cap) and most-influential businesses in the country and are comprised of:
- Microsoft (MSFT +1.03%)
- Apple (AAPL 0.27%)
- Nvidia
- Alphabet (GOOGL 0.49%)(GOOG 0.47%)
- Amazon (AMZN 1.08%)
- Meta Platforms (META +0.30%)
- Tesla (TSLA 0.44%)
These seven companies are industry leaders with well-defined long-term catalysts and clear competitive edges. In fact, the four top customers of Nvidia I alluded to earlier are Microsoft, Meta Platforms, Amazon, and Alphabet.
But these are also stocks that billionaires have been avid sellers of in recent quarters... with one exception: e-commerce behemoth Amazon. During the first quarter, nine billionaires piled into Amazon stock, including (total shares purchased in parenthesis):
- Israel Englander of Millennium Management (2,390,755 shares)
- Ole Andreas Halvorsen of Viking Global Investors (1,972,702 shares)
- Chase Coleman of Tiger Global Management (1,438,600 shares)
- Jeff Yass of Susquehanna International (1,336,042 shares)
- Ray Dalio of Bridgewater Associates (1,047,891 shares)
- Dan Loeb of Third Point (900,000 shares)
- Ken Fisher of Fisher Asset Management (785,018 shares)
- Ken Griffin of Citadel Advisors (352,453 shares)
- Philippe Laffont of Coatue Management (241,514 shares)
You'll note that three of the biggest sellers of Nvidia stock (Laffont, Griffin, and Englander) were buyers of Amazon shares.
NASDAQ: AMZN
Key Data Points
Though Amazon's online marketplace is considered the "face" of the company, it's not why billionaires have taken the plunge. Amazon's exceptional growth in cash flow has everything to do with its trio of fast-growing ancillary operating segments.
Nothing is more important to Amazon's cash flow or bottom line than the ongoing growth and success of cloud infrastructure service platform Amazon Web Services (AWS). Based on an analysis from Canalys, AWS accounted for a hearty 31% of global cloud infrastructure service spending to end 2023. As of the March-ended quarter, AWS had surpassed $100 billion in annual run-rate sales. With enterprise cloud spending still rapidly accelerating, the juicy margins associated with cloud services should allow Amazon to rapidly grow its operating cash flow.
Subscription services (e.g., Prime) is another segment that can deliver sustained double-digit growth potential. In exchange for Prime member perks like free two-day shipping on most online marketplace orders and access to Amazon's growing content library, Amazon enjoys strong subscription pricing power with Prime. Amazon surpassed 200 million global Prime subscribers in April 2021, according to then-CEO Jeff Bezos, and has almost certainly added to this total.
The third higher-margin ancillary segment that does some heavy lifting for Amazon is advertising. When you're driving in the neighborhood of 2.5 billion monthly visitors to your site each month, as well as growing the number of Prime subscribers, it's easy to command higher prices from advertisers who want motivated shoppers to see their message(s).
Put these three ancillary segments together and you get a company slated to more than double its cash-flow-per-share between 2023 and 2027. Relative to its future cash flow, Amazon remains historically cheap.
