Established hedge fund managers bought Broadcom shares in the second quarter.
Artificial intelligence (AI) enthusiast Nvidia (NVDA 1.40% ) has been generating phenomenal returns for shareholders recently, with the chipmaker completing a 1-for-10 stock split in June, resetting its skyrocketing share price.
Still, the hedge fund manager listed below reduced his Nvidia holdings in the second quarter and reinvested his profits into Broadcom ( AVGO -0.25% ), another semiconductor company that recently completed a 1-for-10 stock split.
Israel Englander of Millennium Management sold 676,242 shares of Nvidia, reducing his holdings by 5%, and increased his holdings in Broadcom by 55%, making it his eighth-largest position excluding options. Ken Griffin of Citadel Advisors sold 9.2 million shares of Nvidia, reducing his holdings by 79%, while increasing his holdings in Broadcom by 64%, making it his 10th-largest position excluding options. David Shaw of DE Shaw & Co. sold 12.1 million shares of Nvidia, reducing his holdings by 52%, while increasing his holdings in Broadcom by 229%, making it his seventh-largest position.
The Englander, Griffin and Shaw trades are worth noting because these three asset managers run the best-performing hedge funds, as measured by net returns since inception. Here's what investors need to know about Nvidia and Broadcom.
Nvidia: The splitting AI stock the billionaire was selling
Nvidia's graphics processing units (GPUs) are the gold standard in accelerated computing, a field that combines specialized hardware and software to speed up complex workloads like 3D graphics and AI applications. Nvidia has more than 95% market share in workstation graphics processors and more than 90% market share in data center GPUs. More importantly, the company now accounts for more than 80% of AI chip sales.
Nvidia's success is due in large part to its robust software ecosystem. The company's CUDA platform includes hundreds of software libraries (building blocks) that streamline model training and application development across a variety of domains, including scientific computing, data science, and machine learning. The CUDA ecosystem has been in development for almost two decades, making Nvidia GPUs the go-to choice for developers of accelerated computing applications, especially in AI-related domains.
CFRA's Angelo Gino believes Nvidia “will be the most important company in our civilization for the next decade.” Here's an important point: Despite reducing their Nvidia holdings in the second quarter, two of the hedge fund managers mentioned above still have significant exposure to the stock. Excluding options, Nvidia is the fifth-largest holding in Israel Englander's portfolio and the third-largest in David Shaw's.
NVIDIA shares could be volatile in the short term as the company reports earnings on August 28 and Blackwell GPU shipments are reportedly delayed by three months. These chips, which offer much faster AI training and inference than the previous Hopper architecture, were expected to ship later this year. Management is expected to address the situation on the company's earnings conference call, which could send the stock soaring.
That said, Blackwell's GPUs are due to ship eventually, and Nvidia is ideally positioned to benefit as companies spend more on AI. Wall Street expects the company's earnings to grow 37% annually over the next three years, which makes the company's current valuation of 73 times earnings look relatively reasonable. These numbers represent a price-to-earnings growth ratio (PEG) of 2, well below its three-year average of 3.1.
Investors interested in holding Nvidia stock should start with a small position today and consider buying a few more shares if the stock price falls when the company reports earnings later this month.
Broadcom: The stock-splitting AI stock billionaires are buying
Broadcom has two businesses: semiconductor solutions and infrastructure software. The company has a strong presence in both. In semiconductor solutions, Broadcom is a market leader in networking chips and application-specific integrated circuits (ASICs) — custom chips for specialized use cases like AI.
In the infrastructure software space, VMware, a subsidiary of Broadcom, is a market leader in server virtualization software and hyperconverged infrastructure, a software-defined platform that combines virtualized compute, storage, and networking to help companies use their physical infrastructure more efficiently. Forrester Research also ranks the company as a leader in cloud cost management software.
While Broadcom's leadership in networking chips should help it monetize AI, its leadership in ASICs could be an especially big boost. Currently, ASICs account for less than 10% of AI chips, but Morgan Stanley believes that figure could reach 30% within five years. This prediction means ASICs will take share from GPUs in AI computing. Goldman Sachs analysts recently wrote, “Alongside Nvidia, we see Broadcom as a key part of the ongoing AI infrastructure buildout.”
Going forward, Wall Street expects Broadcom to grow its non-GAAP earnings per share at 21% annually through 2026. At this consensus estimate, its current valuation of 37.8 times non-GAAP earnings looks reasonable. Patient investors should consider making a small purchase of this semiconductor stock today.
Trevor Jennewine invests in Nvidia. The Motley Fool invests in and recommends Goldman Sachs Group and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
