Over the past three decades, Wall Street has never been at a loss for next-big-thing investment trends or innovations that could change the growth trajectory for the U.S. and global economy. Seemingly nothing has rivaled 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 AI has theoretical utility in almost every sector and industry. It’s why the analysts at PwC estimate AI could add $15.7 trillion to the global economy by 2030.
When big numbers like this get tossed around, Wall Street’s brightest minds take notice. But while billionaires have been eager to take advantage of the rise of AI by putting their money to work in high-octane growth stocks, they’ve also not been shy about reducing their stakes in what I’ve come to refer to as the “infrastructure backbone” of the AI movement.
Billionaire investors are showing the most-direct AI beneficiary to the door
No company has more directly benefited from artificial intelligence than semiconductor stock Nvidia (NVDA). Its A100 and H100 graphics processing units are the “brains” in AI-accelerated data centers that power split-second decision-making by AI-driven software and systems. By some estimates, Nvidia controls a 90% or greater share of all AI-GPUs deployed in high-compute enterprise data centers.
Despite this dominance, eight prominent billionaire investors reduced their respective fund’s stakes in Nvidia during the December-ended quarter. Based on Form 13F filings with the Securities and Exchange Commission, these eight billionaire sellers include (total shares sold in parentheses):
- Israel Englander of Millennium Management (1,689,322 shares)
- Jeff Yass of Susquehanna International (1,170,611 shares)
- Steven Cohen of Point72 Asset Management (1,088,821 shares)
- David Tepper of Appaloosa Management (235,000 shares)
- Philippe Laffont of Coatue Management (218,839 shares)
- Chase Coleman of Tiger Global Management (142,900 shares)
- John Overdeck and David Siegel of Two Sigma Investments (30,663 shares)
While profit-taking in the top-performing megacap stock of 2023 may be one explanation why more than a half-dozen billionaires sent Nvidia to the chopping block, a flurry of headwinds provides further detail.
In fiscal 2024 (ended Jan. 28), Nvidia recorded 217% sales growth for its Data Center segment. Most of this growth was driven by higher prices for its A100 and H100 GPUs, as evidenced by a substantially smaller 43% increase in cost of revenue (across all operating segments) from the previous year. With new competition entering the space, and Nvidia increasing the production of its own chips, GPU scarcity should be less of a talking point by the latter half of this year. As Nvidia’s pricing power weakens, so will its gross margin.
To add to this, Nvidia’s four largest customers, which account for roughly 40% of its total sales, are developing AI-focused GPUs of their own. Although these chips are being used to complement Nvidia’s GPUs, it more than likely signals a peak in orders from these four “Magnificent Seven” customers.
Billionaires might also be displeased with the lack of assistance Nvidia is getting from U.S. regulators. Nvidia developed AI-GPUs specifically for the Chinese market — the A800 and H800 — after an initial round of export restrictions. Unfortunately, U.S. regulators hit Nvidia with a new round of export curbs last year that also affected the A800 and H800.
Lastly, history hasn’t been kind to next-big-thing investment trends. Since the advent of the internet, every “can’t-miss” trend has endured an early-stage bubble. History strongly suggests AI won’t be the exception.
Palantir Technologies
While top-tier billionaires were busy selling shares of Nvidia in the fourth quarter, they were eager buyers of two hypergrowth companies with AI ties. The first of those two is data-mining juggernaut Palantir Technologies (PLTR). Per 13Fs, four successful billionaires purchased shares, including (total shares purchased in parentheses):
- Israel Englander of Millennium Management (10,669,404 shares)
- Philippe Laffont of Coatue Management (2,553,432 shares)
- Jeff Yass of Susquehanna International (1,279,138 shares)
- Ken Griffin of Citadel Advisors (1,028,089 shares)
You’ll note that three of the biggest sellers of Nvidia (Englander, Laffont, and Yass) were some of the biggest buyers of Palantir stock in the December-ended quarter.
The top reason to buy shares of Palantir is that the company, at scale, is irreplaceable. Palantir’s AI-driven Gotham platform assists federal governments with data collection and mission planning, among other tasks. Meanwhile, Foundry is a platform used by businesses to help them make sense of their data in order to streamline their operations. There is no one-for-one replacement for what Palantir offers federal governments and businesses through its portfolio of services.
For years, Gotham has been Palantir’s primary growth driver. The government contracts Palantir wins are often spread out over four or five years, which leads to highly predictable operating cash flow.
However, Gotham’s long-term ceiling is somewhat limited. There are certain governments around the world that Palantir’s management team won’t allow to use it AI-driven platform. This is what makes the company’s burgeoning Foundry platform so important for future growth.
Last year, commercial revenue grew by 20% to $1 billion, with commercial sales in the U.S. rising by 36%. More importantly, commercial customer count jumped 44% to 375. While a 44% uptick is impressive, the fact that Palantir only has 375 commercial clients shows how early it is in its enterprise-focused expansion phase.
It’s pretty evident that billionaires are enticed by the long-term prospects of Palantir’s Foundry segment.
Salesforce
The other high-octane growth stock with artificial intelligence ties that billionaires were buying during the December-ended quarter is cloud-based customer relationship management (CRM) software provider Salesforce (CRM 1.05%). A half-dozen top-notch billionaires purchased shares of Salesforce, including (total shares purchased in parentheses):
- Philippe Laffont of Coatue Management (2,144,062 shares)
- Ken Fisher of Fisher Asset Management (736,986 shares)
- Israel Englander of Millennium Management (533,187 shares)
- Ken Griffin of Citadel Advisors (198,007 shares)
- Jeff Yass of Susquehanna International (97,603 shares)
- Jim Simons of Renaissance Technologies (89,045 shares)
As with Palantir, Laffont, Englander and Yass were buyers of Salesforce stock and sellers of Nvidia shares.
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 would be likeliest to purchase a new product or service. It deploys AI to handle repetitive tasks, such as data entry, so customer service representatives are free to handle more complex issues.
According to IDC, Salesforce’s CRM applications have been ranked No. 1 in global market share for 10 consecutive years, through the first half of 2023. In fact, its four closest competitors don’t even add up to its market share of worldwide CRM solutions. With its position atop the CRM leaderboard safe, double-digit year-over-year sales growth is the expectation.
Management has also helped the company by making regular, earnings-accretive, bolt-on acquisitions. Under the guidance of co-founder and CEO Marc Benioff, Salesforce has completed a number of buyouts, including Slack Technologies and Tableau Software. These deals are expanding its service ecosystem and providing more cross-selling opportunities for Salesforce.
Even if the AI bubble were to burst, Salesforce’s immense moat in CRM would insulate it from the downdraft.
— Sean Williams
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Source: The Motley Fool