You may not realize it, but one of the most important data releases of the quarter happened about two weeks ago. On May 15, institutions with at least $100 million in assets under management were required to file Form 13F with the Securities and Exchange Commission.
Simply put, a 13F gives investors over-the-shoulder access to Wall Street’s brightest investing minds. While the data may be delayed by more than six weeks, it provides a snapshot of what Wall Street’s top investors bought and sold in the last quarter (in this case, the 13Fs detailed trading activity for the first quarter). These documents can be especially useful in identifying the stocks, sectors, industries and innovations that asset managers are buying or avoiding.
The latest round of 13Fs shows that billionaires were busy bees during the first quarter. With the Dow Jones Industrial Average, S&P500And Nasdaq Composite On their way to new all-time highs, billionaires chose to invest in two hyper-growth stocks. Perhaps the biggest surprise of all is that one of the fastest growing companies in the world, the artificial intelligence (AI) titan Nvidia (NASDAQ: NVDA)got the wind from billionaire investors.
More than half a dozen billionaires have dumped Nvidia stock
Following the release of its first quarter (ended April 28) corporate results, Nvidia shares are up 115% this year, adding more than $2.2 trillion in market value since the start of 2023. However, this didn’t stop eight prominent billionaire investors from exiting during the quarter ending in March (total shares sold in brackets):
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Philippe Laffont of Coatue Management (2,937,060 shares)
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Ken Griffin of Citadel Advisors (2,462,716 shares)
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Israel Englander of Millennium Management (720,004 shares)
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Stanley Druckenmiller of Duquesne Family Office (441,551 shares)
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David Siegel and John Overdeck of Two Sigma Investments (420,801 shares)
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David Tepper of Appaloosa Management (348,000 shares)
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Steven Cohen of Point72 Asset Management (304,505 shares)
The three most likely reasons why these successful billionaires are parting ways with some of their respective Nvidia shares likely come down to three factors: history, pricing power, and competition.
Regarding the former, there hasn’t been a next-big-thing innovation in thirty years where investors haven’t overestimated the adoption of this innovation. Whether it concerns the internet, business-to-business trading, genome decoding, nanotechnology, 3D printing, blockchain technology or the reverse: investors are constantly missing out when it comes to the adoption or application of new innovations. While artificial intelligence can be hugely successful in the long run, there is a good chance that we will once again witness another early-stage bubble.
Second, Nvidia is about to face strong hardware competition in high-compute data centers. Intel is poised to release its Gaudi 3 AI accelerator in the third quarter Advanced micro devices has been steadily ramping up the release of its MI300X graphics processing unit (GPU).
The concern with this external competition is that it will reduce the scarcity that has helped drive the retail price of Nvidia’s H100 GPUs into the stratosphere. As the availability of AI GPUs improves, Nvidia’s pricing power should decrease. This could explain why Nvidia’s fiscal guidance for the second quarter calls for gross margin to contract by 235 to 335 basis points versus the subsequent first quarter.
Finally, Nvidia could see increased competition for AI-accelerated data center space from its top customers. Nvidia’s four largest customers account for about 40% of net revenue, and all are currently developing their own AI GPUs. Even if these internal chips are used in a complementary manner, this potentially means a top in gross margin and scale for this $2.6 trillion AI giant.
But as billionaires sold Nvidia stock, they piled into the next two hypergrowth stocks.
Okay
The first snap stock to grab the undivided attention of billionaire money managers when they hit the sell button on Nvidia is a cybersecurity company Okay (NASDAQ: OKTA). Five top billionaires – six, if you count the recently deceased Jim Simons of Renaissance Technologies – opened or expanded their positions in Okta during the quarter ended in March, including (total shares purchased in brackets):
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Israel Englander of Millennium Management (278,971 shares)
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David Siegel and John Overdeck of Two Sigma Investments (274,832 shares)
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Ken Griffin of Citadel Advisors (133,918 shares)
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Ray Dalio of Bridgewater Associates (22,996 shares)
Okta had a challenging end to 2023 after admitting that hackers hacked its platform and gained access to sensitive information. It’s not unusual for cybersecurity companies to stumble for a few quarters after such an admission. However, billionaires believe that this fast-growing security company offers a decent value proposition.
What appeals to Okta is its cloud-native, AI and machine learning-driven cybersecurity platform. While it still needs refinement (as evidenced by the October breach), a cloud-based, AI-driven identity verification platform has the ability to become more efficient at recognizing and responding to potential threats over time, and is it is much more agile than on-site solutions.
What billionaires probably like about Okta is its subscription-based business model. Subscriptions generate predictable operating cash flow and high margins quarter after quarter. As of fiscal 2024 end (January 31, 2024), Okta had nearly $3.4 billion in remaining performance obligations (primarily the subscription backlog) and enjoyed a full-year gross profit margin of 74.3%, up 370 basis points versus previous years. last year. As Okta scales, gross margin should approach 80%.
Additionally, the company has moved past the high integration costs associated with the 2022 acquisition of Auth0. Acquiring Auth0 meaningfully expanded Okta’s presence in the $30 billion customer identity market and provided the company with a clear path to expand its solutions for sale outside the borders of the US.
Over the next four years, Okta’s earnings growth could double its revenue growth.
Data hound
The second hypergrowth stock that billionaires couldn’t stop buying in the quarter ended March, as they sent Nvidia stock to the chopping block, is a cloud-based observation company Data hound (NASDAQ:DDOG). Like Okta, five billionaires took the plunge in the first quarter, including (total shares purchased in brackets):
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Israel Englander of Millennium Management (2,076,411 shares)
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Ken Griffin of Citadel Advisors (2,053,632 shares)
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Steven Cohen of Point72 Asset Management (873,186 shares)
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David Siegel and John Overdeck of Two Sigma Investments (93,409 shares)
The biggest challenge a company like Datadog has faced in the past year is the prospect of a recession in the US. A number of predictive indicators, such as the first decline in M2 money supply since the Great Depression, point to a real likelihood of a recession in the not-too-distant future. It is not unusual for fast-growing companies to scale back capital expenditures during short-lived economic downturns.
Fortunately, the US economy has remained strong, fueling the macro and company-specific catalysts for Datadog.
On a macro basis, the permanent shift we’ve seen in the workforce following the COVID-19 pandemic has worked in Datadog’s favor. With a hybrid work environment – that is, a mix of office-based and mobile workers – Datadog platforms are being relied on more than ever to observe and secure data flows and user activity across the cloud.
One of the company’s key growth drivers is its enterprise cloud spending. In 2019, about 5% of all global information technology (IT) spending went to the cloud. By 2027, it is estimated that almost 20% of global enterprise IT spending will be spent on the cloud. Datadog is experiencing continued double-digit growth as companies ramp up their move to the cloud.
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Sean Williams has positions at Intel. The Motley Fool holds positions in and recommends Advanced Micro Devices, Datadog, Nvidia, and Okta. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 relying on Intel and short May 2024 $47 relying on Intel. The Motley Fool has a disclosure policy.
Forget Nvidia: billionaires are selling it and buying these two hyper-growth stocks instead. originally published by The Motley Fool
