Approximately three decades ago, the advent of the internet began changing the growth trajectory for businesses around the globe. While numerous innovations, technologies, and trends have come along since then, none have come close to altering the growth arc quite like the internet... until now.
The arrival of artificial intelligence (AI) is the first next-big-thing innovation in 30 years that represents a true leap forward in growth potential for businesses.
With AI, software and systems are given autonomy to oversee tasks that humans would normally undertake. The machine learning capacity of AI-driven software and systems is what affords this technology a seemingly limitless ceiling, as well as utility in virtually all sectors and industries.
Although we've witnessed dozens of companies benefit from the AI revolution, there's little denying that semiconductor colossus Nvidia (NVDA 1.40%) has been the face of the AI movement.
Image source: Getty Images.
Nvidia's hardware has become the "brains" of the artificial intelligence revolution
When 2023 kicked off, Nvidia had a roughly $360 billion market cap. But shortly after completing a historic 10-for-1 forward split in June 2024, its valuation peaked at $3.46 trillion. It took less than 18 months for Nvidia to tack on more than $3 trillion in market value and skyrocket to the top of the pecking order on Wall Street.
Though stock-split euphoria played some role in Nvidia's ascent, the bulk of the credit goes to the company's industry-leading AI hardware.
Nvidia's H100 graphics processing unit (GPU) has become the go-to chip used for split-second decision-making in AI-accelerated data centers running generative AI solutions and training large language models. And when I say "go-to," it's not an exaggeration. The analysts at TechInsights estimate that Nvidia accounted for 98% of the 3.85 million GPUs shipped to data centers in 2023.
Nvidia has also found itself in the enviable position of possessing exceptional pricing power. Demand for its GPUs is measurably outweighing supply. Nvidia has had no trouble logging orders, even with the selling price of its H100 GPU being two or three times higher than competing chips. These higher prices have lifted the company's adjusted gross margin by 13.7 percentage points to 78.4% over the previous five quarters (ended April 28, 2024).
Furthermore, investors have taken solace in the fact that many of the world's most-influential tech companies are Nvidia's largest customers. Four members of the "Magnificent Seven" account for around 40% of Nvidia's net sales.
But even though Nvidia's operating ramp has been textbook, not everyone on Wall Street -- or even in key leadership positions at Nvidia -- thinks the stock is headed higher.
NASDAQ: NVDA
Key Data Points
Top-notch billionaires and company insiders are big-time sellers of Nvidia stock
Every quarter, institutional investors and money managers with at least $100 million in assets under management are required to file Form 13F with the Securities and Exchange Commission. A 13F allows investors to take an under-the-hood look at the portfolios of Wall Street's most-successful investors to see what they've been buying and selling.
Based on 13Fs that cover trading activity for the first three months of the year, eight top-notch billionaires – or nine, if you include Jim Simons of Renaissance Technologies, who passed away in May – were sellers of Nvidia stock (total shares sold in parenthesis have been adjusted for the company's 10-for-1 stock split):
- Philippe Laffont of Coatue Management (29,370,600 shares)
- Ken Griffin of Citadel Advisors (24,627,160 shares)
- Israel Englander of Millennium Management (7,200,040 shares)
- Stanley Druckenmiller of Duquesne Family Office (4,415,510 shares)
- John Overdeck and David Siegel of Two Sigma Investments (4,208,010 shares)
- David Tepper of Appaloosa (3,480,000 shares)
- Steven Cohen of Point72 Asset Management (3,045,050 shares)
While I'll get into the details of this billionaire money manager exodus in a moment, it's important to recognize that billionaires aren't the only prominent people dumping shares of Nvidia.
In December 2020, Colette Kress, Nvidia's Chief Financial Officer, purchased 200 shares of her company's stock on the open market. In the subsequent three years and eight months since Kress added these shares, no Nvidia executives or board members have made an open-market purchase.
Meanwhile, more than $1.6 billion worth of Nvidia stock has been sold by insiders over the trailing-12-month period, including CEO Jensen Huang. Since June 13, six days after his company's historic stock split took effect, Huang has netted $554,846,547 from selling shares of Nvidia.
Image source: Getty Images.
Billionaire investors and insiders are (likely) selling for good reason
The all-important question is: Why are billionaire asset managers and company insiders selling shares of Nvidia stock at such an alarming pace?
The answer, I suspect, boils down to a combination of history, competition, valuation, and some benign factors, such as profit-taking and tax purposes.
Despite AI possessing the attributes of Wall Street's next game-changing technology, history has repeatedly shown that professional and everyday investors overestimate how quickly businesses and/or consumers will adopt and utilize new innovations. This is a roundabout way of saying that all new technologies, innovations, and trends need to time to mature. Wall Street is pricing AI stocks as if there'll be no bumps in the road, when history tells us that growing pains are part of the maturation process. If and when the artificial intelligence bubble bursts, Nvidia will take it on the chin.
Growing competition for data center "real estate" is another front-and-center concern. With the first domino falling and Nvidia's next-generation Blackwell architecture delayed by at least three months because of a design flaw and supply issues, it opens the door for external competitors to grab share.
Furthermore, the aforementioned four Magnificent Seven members that account for around 40% of Nvidia's net sales are all internally designing AI-GPUs of their own. Even if these AI-GPUs are used in a complementary fashion to Nvidia's H100 chips, it means less physical space in high-compute data centers for Nvidia's hardware.
NVDA PS Ratio data by YCharts. PS = price-to-sales ratio.
Valuation is another clear worry. Although Nvidia's forward price-to-earnings ratio still makes sense, its trailing-12-month price to sales ratio peaked in June at a nearly identical level to Wall Street's leading businesses prior to the dot-com bubble bursting. History may not repeat on Wall Street, but it certainly has a tendency to rhyme.
Last but not least, we might be witnessing some simple profit-taking by prominent billionaire investors, and some tax-related selling by company insiders. Awarded options can sometimes account for the lion's share of compensation that executives receive, which means selling stock to cover the eventual tax bill. Not all insider selling is necessarily bad news.
Nevertheless, with billionaires running for the exit for two consecutive quarters and insiders unwilling to buy shares on the open market since late 2020, there are ample reasons for investors to keep their distance from Nvidia.
