In the third quarter, a few wealthy hedge fund managers sold shares of Amazon (AMZN 1.34%) and bought shares of Rigetti Computing (RGTI 4.31%), a quantum computing stock that has advanced 3,050% since January 2023.
- Israel Englander at Millennium Management sold 787,900 shares of Amazon, reducing his position by 17%. He also added 522,100 shares of Rigetti.
- Ken Griffin at Citadel Advisors sold 1.6 million shares of Amazon, reducing his position by 35%. He also added 51,700 shares of Rigetti.
- Steven Schonfeld at Schonfeld Strategic Advisors sold 253,700 shares of Amazon, reducing his position by 72%. He also added 8,900 shares of Rigetti.
Importantly, all three hedge fund managers beat the S&P 500 (^GSPC 1.18%) during the past three years, which makes them good sources of inspiration. Here's what investors should know about Amazon and Rigetti.
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Amazon: The artificial intelligence stock the billionaires sold
Amazon has a strong position in three industries. It runs the largest online marketplace in North America and Western Europe by gross merchandise volume, it is the largest retail advertiser in the world by sales, and Amazon Web Services (AWS) is the largest public cloud by cloud infrastructure and platform services revenue.
The company is leaning on artificial intelligence (AI) to improve sales and efficiency. Its AI shopping assistant, Rufus, is on pace to deliver $10 billion in sales this year; shoppers are 60% more likely to make a purchase when they engage Rufus. Amazon has also developed more than 1,000 generative AI tools to optimize tasks like inventory placement, demand forecasting, and last-mile delivery.
Meanwhile, AWS has been introducing AI features at a rapid clip. In the past few months, it added tools to Bedrock AgentCore that help customers build and deploy generative AI agents. The company also added autonomous agents for software development, security fixes, and performance monitoring. And it expanded its portfolio of pretrained models.
Strong third-quarter financial results suggest those innovations are paying off. Revenue increased 13% to $180 billion, driven by particularly strong sales growth in the advertising services and cloud computing segments. Meanwhile, excluding two one-time charges, operating income increased 25% to $21.7 billion, meaning the company is becoming increasingly profitable (i.e., operating income outpaced revenue).
Wall Street expects Amazon's earnings to increase at 18% annually over the next three years. That makes the current valuation of 32 times earnings look reasonable, especially when the company beat the consensus earnings estimate by an average of 23% during the past six quarters.
So why did Israel Englander, Ken Griffin, and Steven Schonfeld sell shares of Amazon in the third quarter? Concerns about tariffs may have factored into the decision, or maybe they saw compelling buying opportunities elsewhere. Regardless, do not assume they have lost confidence. All three still own Amazon, and excluding options, the stock is still a top-10 holding for Englander and Griffin.
NASDAQ: RGTI
Key Data Points
Rigetti Computing: The quantum computing stock the billionaires bought
Rigetti specializes in superconducting quantum computing, a modality by which microscopic superconducting circuits are cooled to near absolute zero to create qubits, the basic unit of information in quantum computers. The company has two important competitive moats:
- Rigetti benefits from vertical integration, meaning it realizes cost efficiencies by controlling much of its supply chain. The company owns a chip fabrication facility where it manufactures quantum processors; it also develops the infrastructure (hardware and software) required to deliver cloud-based quantum services.
- Rigetti developed the first multi-chip quantum processor, a large chip comprising several smaller chiplets. Scaling quantum computers -- building systems with enough qubits to solve useful problems -- is difficult because of high error rates. But Rigetti believes its multi-chip architecture will help overcome that problem.
However, widely useful quantum computers -- meaning systems that fix errors in real time and have enough qubits to solve complex problems -- are probably a decade or two away. Experts think quantum systems will need 10,000 to 1 million physical qubits to be widely useful, and Rigetti's product roadmap doesn't even contemplate 1,000-quibit systems until 2027.
Basil Alsikafi, portfolio manager at White Brook Capital, in his third-quarter investor letter highlighted Rigetti's mismatched fundamentals. Year to date, Rigetti reported revenue of $5 million but a net loss of $198 million, meaning losses have exceeded sales 40 times over. Even more alarming is the valuation.
Rigetti trades at 860 times sales. For context, Palantir is the most expensive stock in the S&P 500 at 115 times sales, which itself is absurd. Rigetti is seven times more expensive. Also, the company has rapidly diluted shareholders by issuing stock to compensate for its losses. The number of outstanding shares rose 71% in the past year.
So why did Englander, Griffin, and Schonfeld buy shares of Rigetti? I think the decision is about momentum. They may hope to turn a quick profit and then sell the shares. It would be wrong to assume they have lasting conviction in Rigetti. None of the three hedge fund managers have a consequential amount of money invested in the stock.
