Just over two months ago, on August 14, investors received what could perhaps be described as the most important third quarter figures – and I’m not talking about inflation reports.
No later than 45 calendar days after the end of a quarter, institutional investors with at least $100 million in assets under management (AUM) must file Form 13F with the Securities and Exchange Commission. This filing tells investors which stocks, exchange-traded funds (ETFs), and sometimes options, Wall Street’s top money managers bought and sold in the last quarter (in this case, the quarter ending in June).
As you might imagine, professional and casual investors are particularly interested in how Wall Street’s smartest money managers are handling artificial intelligence (AI) stocks. AI has been the hottest trend over the past two years, with PwC analysts expecting this technology to deliver a $15.7 trillion boost to the global economy by 2030.
Interestingly, the second quarter 13Fs show that billionaire investors, including Citadel’s Ken Griffin, have a mixed view of the companies driving the AI revolution.
Since its inception in 1990, Citadel’s hedge fund has been more successful in generating investment profits than any other hedge fund. That’s why investors are wisely paying attention to what Griffin and his team are buying and selling.
During the quarter ending in June, Griffin oversaw the sale of a significant percentage of his fund’s stake in leading AI stocks Nvidia (NASDAQ: NVDA)but chose to delve into another AI company that seems to have a near-insurmountable moat.
Let me preface this discussion by pointing out that Citadel is an active hedge fund with numerous positions, and it often hedges its common stock holdings with put and/or call options. That said, perhaps no sell-side activity in the second quarter was more notable than Griffin and his team losing 79% of their fund’s stake in Nvidia.
Since the start of 2023, Nvidia shares have risen 844%, as of the closing bell on October 18, 2024, reaching a market cap of nearly $3 trillion. These are unprecedented profits from a leading company, suggesting that profit-taking has at least played a role in reducing Citadel’s significant position. But there’s a reasonable chance that this sales activity is about more than benign profit-taking.
For starters, competition is coming from all angles at Nvidia. Rival chipmakers are developing and increasing production of AI graphics processing units (GPUs) designed to complement Nvidia’s ultra-popular H100 GPU and the next-generation Blackwell GPU architecture. While Nvidia’s hardware should have no trouble maintaining a computing advantage in AI-accelerated data centers, competing chips are cheaper and may be easier for companies to get their hands on.
To build on this point, competition from within can be even more dangerous. All four of Nvidia’s largest customers by net revenue are developing AI GPUs for use in their data centers. Nvidia’s hardware retaining computing advantages may not be enough compared to the cost advantages of internally developed chips. This suggests that Nvidia could lose out on valuable data center real estate in the long term.
Ken Griffin and his team at Citadel may also be taking cues from Nvidia’s management team. While CEO Jensen Huang has been incredibly optimistic about the future of his company and its successor to the Blackwell chip, it’s been four years since a company insider last bought shares of its stock on the open market. A barrage of insider selling paints a picture that implies Nvidia stock has gotten ahead of itself.
Finally, Griffin may let history serve as a guide. Despite the buzz around the rise of AI, no breakthrough innovation or technology in the past thirty years has been able to avoid an early-stage bubble. Professional and private investors consistently overestimate the adoption and utility of new technologies, ultimately leading to disappointment and a bubble burst. Since no stock has benefited more from the AI revolution than Nvidia, it would likely be hit hardest if the AI bubble burst.
But while billionaire Ken Griffin was meaningfully reducing his fund’s stake in Nvidia, he was buying another AI company with clearly defined competitive advantages.
The high-flying artificial intelligence stock that caught the attention of Citadel’s smartest investors, including Griffin, is none other than a cloud-based data mining specialist. Palantir Technologies (NYSE:PLTR). Citadel’s hedge fund increased its stake in the company by about 1,140% in the second quarter.
The best answer to “why Palantir?” is because it is irreplaceable on a large scale.
Palantir’s two main operating segments are Gotham and Foundry. Gotham is an AI-powered platform that helps government agencies collect data and plan various missions. Consider the autonomous task of satellites and drones.
Meanwhile, Foundry is Palantir’s AI and machine learning-inspired platform aimed at businesses. Its job is to make sense of large amounts of data and helps companies streamline their operations. While there are companies incorporating bits and pieces of what Gotham and/or Foundry have to offer, nothing else comes close to Palantir’s scale. Wall Street tends to reward uniqueness, irreplaceability, and sustainable moats.
Much of Palantir’s growth has been fueled by Gotham. Many of the contracts Palantir wins from government agencies are for multiple years, resulting in highly predictable operating cash flow. But Gotham’s long-term growth potential is also fairly limited, as Palantir will only grant access to the US and its allies.
Palantir’s future depends heavily on Foundry’s success. Although the expansion is still in its early stages, the commercial segment of the company appears to be finding its footing. The number of Enterprise customers increased by 55% to 467 on June 30 compared to the prior year period, with revenue from this segment increasing by 33%. Since the addressable market for Foundry doesn’t have a glass ceiling like Gotham, this market has the potential to become a significantly bigger profit driver in the second half of this decade.
The only notable downside to Palantir is its valuation. While Citadel was well ahead of its recent run-up, validating Palantir’s price-to-earnings (P/E) ratio of 100 is a tough call! While it appears to have all the tools and intangibles needed for long-term success, Palantir stock may struggle in the short term.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.
Billionaire Ken Griffin sold 79% of Citadel’s stake in Nvidia, plunges into another artificial intelligence (AI) stock with a competitive moat was originally published by The Motley Fool
