Billionaire Ken Griffin is the founder and CEO of Citadel Advisors, the most profitable hedge fund in history as measured by net profits, according to LCH Investments. That makes Griffin one of Wall Street’s most successful money managers, so investors should consider following his trades with the quarterly Forms 13F.
In the second quarter, Griffin sold 9.2 million shares Nvidia (NASDAQ: NVDA)reducing his exposure by 79%. In the meantime, he bought 98,752 shares of Super microcomputer (NASDAQ:SMCI)increasing his position by 96%. Currently, Citadel still has more capital invested in Nvidia than Supermcro, but the trades are nevertheless notable as they may indicate a shift in sentiment.
Here’s what investors need to know about each of these companies.
Nvidia
Nvidia is best known for its graphics processing units (GPUs), chips used to accelerate data center workloads, such as training large language models and running artificial intelligence (AI) applications. “Nvidia is setting the pace for AI infrastructure worldwide. Without Nvidia GPUs, modern AI would not be possible,” said analysts at Forrester research.
Nvidia has about a 90% market share in AI chips, and analysts expect similar levels of dominance to continue over the next two to three years. That seems likely for two reasons.
First, developers prefer Nvidia GPUs because they are the fastest accelerators on the market, but also because they are supported by a more robust ecosystem of software development tools than competing products. Second, Nvidia provides adjacent data center hardware, including central processing units (CPUs) and network switches, designed for AI. The company also provides software and cloud services that support the development of AI applications. That means Nvidia can innovate across the entire data center computing stack, leading to higher-performing systems with lower power requirements, said CEO Jensen Huang.
Importantly, when Ken Griffin sold shares in the second quarter, Nvidia stock was trading at an average valuation of 67 times earnings, peaking at around 79 times earnings. But Nvidia’s profits more than doubled in the June quarter, sending valuation ratios down. The stock currently trades at 64 times earnings, a slight discount from where it was when Griffin sold.
Moreover, Wall Street expects Nvidia’s revenues to grow 37% annually over the next three years. That is an upward revision from the average consensus of 34% in the second quarter.
In other words, Nvidia stock is slightly cheaper and earnings are expected to grow slightly faster than when Ken Griffin sold shares. These changes make the stock more attractive, so Griffin may have increased Citadel’s position in Nvidia since the end of the second quarter.
Super microcomputer
Super Micro Computer manufactures servers, including complete server racks equipped with storage and networking, to provide a turnkey solution for data center infrastructure. The company’s in-house technical capabilities and modular approach to product design enable the company to bring new technologies to market faster than its competitors. That advantage has helped Supermicro secure a leading position in AI servers.
Importantly, the market is likely to become more competitive Dell Technologies and other equipment makers lean into demand for AI infrastructure, Supermicro’s leadership in direct liquid cooling (DLC) technology could defend its position in AI servers. DLC can reduce data center energy consumption by 40% compared to traditional air cooling, so the percentage of liquid-cooled installations is expected to rise alongside the implementation of AI servers.
Supermicro reported mixed financial results in the fourth quarter of fiscal 2024 (ended June 30). Revenue rose 143% to $5.3 billion. But gross margin fell nearly 6 percentage points to 11.2%, so non-GAAP (generally accepted accounting principles) profits rose only 78%, growing much slower than revenue. That could indicate declining pricing power due to increased competition, but management expects gross margin to return to normal (14% to 17%) by the end of fiscal 2025.
Importantly, Ken Griffin bought Supermicro shares in the second quarter, but his stance on the company may have changed since short seller Hindenburg Research accused Supermicro of accounting manipulation in August. CEO Charles Liang said the allegations were “false or inaccurate statements.” But the company has delayed filing Form 10-K for fiscal year 2024 and has not yet resolved the issue.
For readers with déjà vu, Supermicro was fined $17.5 million in 2020 for violations similar to those outlined by Hindenburg, including prematurely recognizing revenue and understating expenses. The incidents occurred between 2014 and 2017 and caused the company to file its 10-K for fiscal 2017 nearly two years after the due date, resulting in the stock being temporarily removed from the Nasdaq Stock Exchange.
In September, The Wall Street Journal reported that the Department of Justice was investigating Supermicro based on allegations made by a former employee. The allegations are similar to Hindenburg’s, but the investigation is in its early stages and details are scarce. Nevertheless, investors should be aware of the risk.
Looking ahead, Statista estimates that sales of AI servers will grow 30% annually through 2033, and Wall Street expects Supermicro’s adjusted revenues to grow 54% over the next twelve months. These estimates make the current valuation of 22 times adjusted earnings look cheap. However, given the overhanging regulatory issues, I wouldn’t be surprised if Ken Griffin has reduced his position in Supermicro since the second quarter.
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Trevor Jennevine has positions at Nvidia. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Billionaire Ken Griffin Has Sold Most of Citadel’s Nvidia Stock and Is Instead Buying This Stock-Split AI Stock was originally published by The Motley Fool
