Over the past three decades, Wall Street has never been at a loss on the next big investment trends or innovations that could change the growth trajectory for the U.S. and global economies. Seemingly nothing has matched the advent of the Internet in terms of game-changing growth potential, until the artificial intelligence (AI) revolution came along.
In its simplest form, AI involves the use of software and systems for tasks that would normally be overseen by humans. Giving software and systems the ability to learn and evolve over time (i.e. machine learning capabilities) without human intervention means that AI is theoretically useful in virtually every sector and industry. That’s why PwC analysts estimate that AI could add $15.7 trillion to the global economy by 2030.
When big numbers like that come to the fore, Wall Street’s brightest minds take notice. But while billionaires have been eager to capitalize on AI’s rise by putting their money to work in high-octane growth stocks, they have also been reluctant to reduce their stakes in what I call AI’s “infrastructure backbone.” -movement.
Billionaire investors are showing the most direct AI beneficiary to the door
No company has benefited more directly from artificial intelligence than semiconductor stocks Nvidia (NASDAQ: NVDA). The A100 and H100 graphics processing units are the ‘brains’ in AI-accelerated data centers that enable split-second decision making through AI-driven software and systems. By some estimates, Nvidia controls a 90% or more share of all AI GPUs deployed in high-compute enterprise data centers.
Despite this dominance, eight leading billionaire investors cut their respective fund’s stakes in Nvidia during the quarter ended December. Based on Form 13F filings with the Securities and Exchange Commission, these eight billionaire sellers include (total shares sold in parentheses):
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Israel Englander of Millennium Management (1,689,322 shares)
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Jeff Yass of Susquehanna International (1,170,611 shares)
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Steven Cohen of Point72 Asset Management (1,088,821 shares)
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David Tepper of Appaloosa Management (235,000 shares)
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Philippe Laffont of Coatue Management (218,839 shares)
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Chase Coleman of Tiger Global Management (142,900 shares)
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John Overdeck and David Siegel of Two Sigma Investments (30,663 shares)
While profit-taking in the best-performing mega-cap stock of 2023 may explain why more than half a dozen billionaires sent Nvidia to the chopping block, a gust of headwinds offers further details.
In fiscal 2024 (ending January 28), Nvidia posted 217% revenue growth for its data center segment. Most of this growth was driven by higher prices for the A100 and H100 GPUs, as evidenced by a significantly smaller 43% increase in cost of revenue (across all operating segments) versus the previous year. As new competition enters the picture and Nvidia ramps up production of its own chips, GPU shortages should be less of a talking point in the second half of this year. As Nvidia’s pricing power declines, so will its gross margin.
To add to this, Nvidia’s four largest customers, which account for about 40% of total revenue, are developing their own AI-focused GPUs. While these chips are used to complement Nvidia’s GPUs, this most likely signals a spike in orders from these four “Magnificent Seven” customers.
Billionaires could also be unhappy about the lack of help Nvidia is receiving from U.S. regulators. Nvidia developed AI GPUs specifically for the Chinese market – the A800 and H800 – after an initial set of export restrictions. Unfortunately, US regulators hit Nvidia last year with a new round of export restrictions that also affected the A800 and H800.
Finally, history has not been kind to the next big investment trends. Since the advent of the Internet, every must-see trend has weathered an early bubble. History strongly suggests that AI will not be the exception.
Palantir Technologies
While top billionaires were busy selling Nvidia stock in the fourth quarter, they were eager buyers of two hyper-growth companies with AI ties. The first of these two is data mining juggernaut Palantir Technologies (NYSE:PLTR). Per 13Fs, four successful billionaires bought shares, including (total shares bought in brackets):
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Israel Englander of Millennium Management (10,669,404 shares)
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Philippe Laffont of Coatue Management (2,553,432 shares)
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Jeff Yass of Susquehanna International (1,279,138 shares)
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Ken Griffin of Citadel Advisors (1,028,089 shares)
You’ll notice that three of Nvidia’s biggest sellers (England, Laffont and Yass) were among the biggest buyers of Palantir stock in the quarter ending in December.
The main reason to buy Palantir stock is that, at scale, the company is irreplaceable. Palantir’s AI-powered Gotham platform helps federal governments collect data and plan missions, among other things. Meanwhile, Foundry is a platform used by companies to help them understand their data and streamline their operations. There is no one-for-one replacement for what Palantir offers to federal governments and businesses through its portfolio of services.
Gotham has been Palantir’s main growth driver for years. The government contracts that Palantir wins are often spread over four or five years, leading to highly predictable operating cash flow.
However, Gotham’s long-term ceiling is somewhat limited. There are certain governments around the world that do not allow Palantir’s management team to use its AI-driven platform. This is what makes the company’s fast-growing Foundry platform so important for future growth.
Last year, commercial revenues grew 20% to $1 billion, while U.S. commercial sales rose 36%. More importantly, the number of commercial customers increased by 44% to 375. While a 44% increase is impressive, the fact that Palantir only has 375 commercial customers shows how early the company is in its entrepreneurial expansion phase.
It’s pretty clear that billionaires are enticed by the long-term prospects of Palantir’s Foundry segment.
Sales team
The other high-octane growth stock with ties to artificial intelligence that billionaires bought during the quarter ending in December is a cloud-based customer relationship management (CRM) software provider. Sales team (NYSE: CRM). Six prominent billionaires bought shares of Salesforce, including (total shares purchased in brackets):
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Philippe Laffont of Coatue Management (2,144,062 shares)
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Ken Fisher of Fisher Asset Management (736,986 shares)
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Israel Englander of Millennium Management (533,187 shares)
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Ken Griffin of Citadel Advisors (198,007 shares)
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Jeff Yass of Susquehanna International (97,603 shares)
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Jim Simons of Renaissance Technologies (89,045 shares)
As with Palantir, Laffont, Englander and Yass were buyers of Salesforce stock and sellers of Nvidia stock.
Salesforce is the global leader in cloud-based CRM solutions. For those unfamiliar, CRM software helps consumer-facing businesses handle everything from simple data entry tasks to running complex models to determine which customers are most likely to purchase a new product or service. It uses AI to perform repetitive tasks such as data entry, freeing customer service agents to tackle more complex issues.
According to IDC, Salesforce’s CRM applications have been No. 1 in global market share for ten consecutive years through the first half of 2023. In fact, the four closest competitors don’t even add up to the market share of global CRM solutions. . With its position at the top of the CRM leadership, safe double-digit year-on-year revenue growth is expected.
Management has also helped the company by regularly making additional acquisitions that boost profits. Under the leadership of co-founder and CEO Marc Benioff, Salesforce has completed a number of buyouts, including Slack Technologies and Tableau Software. These deals expand the service ecosystem and provide more cross-selling opportunities for Salesforce.
Even if the AI ​​bubble were to burst, Salesforce’s immense CRM moat would protect it from the downturn.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia, Palantir Technologies, and Salesforce. The Motley Fool has a disclosure policy.
Forget Nvidia: Billionaires are selling it and buying these two high-octane artificial intelligence (AI) growth stocks instead. originally published by The Motley Fool
