No. 6 prominent billionaire money managers have sold shares in Wall Street's artificial intelligence (AI) leader for the third consecutive quarter.
The most important data of the quarter was released earlier this week, and I'm not referring to the highly anticipated July inflation report.
Within 45 calendar days of the end of a quarter, institutional investors with $100 million or more in assets under management are required to file Form 13F with the Securities and Exchange Commission. 13F provides an inside glimpse into what stocks Wall Street's smartest, most successful and wealthiest investors have been buying and selling.
Although 13Fs have limitations, such as the fact that they can be 45 days old from the time they are filed and therefore may present outdated data for active fund managers, they provide valuable clues about the stocks, industries, sectors and trends that are catching the interest of Wall Street's best money managers.
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There's been a lot of trading going on in companies involved in artificial intelligence (AI), one of the hottest investment opportunities right now, but the theme of the latest 13F round is that Wall Street billionaire investors continue to reduce their stakes in AI darling Nvidia (NVDA 4.05%).
Nvidia has become the hardware backbone of the artificial intelligence movement
Since turning the page on 2023, Nvidia's stock price has soared 709%, increasing its market capitalization by more than $2.5 trillion as of the close of trading on Aug. 14. The rally has generated huge profits for many billionaire investors and their funds.
The market leader's historic rise is being driven by its data center hardware. More specifically, Nvidia's H100 graphics processing units (GPUs) are the brains behind the split-second decisions required in enterprise data centers to run generative AI solutions and train large-scale language models. According to TechInsights, by 2023, Nvidia's chips will account for a near monopoly (98%) of GPUs shipped to data centers.
The benefit of a high-demand product is the extraordinary pricing power that usually comes with it. Demand for the H100 outstripped supply, allowing Nvidia to raise the selling price of its AI-GPU to $30,000-40,000, which resulted in a significant increase in the company's adjusted gross margins.
But not all asset managers are convinced that Wall Street's AI leader has enough gas left in the tank to deliver results for investors.
Billionaire money manager sells Nvidia shares for third straight quarter
According to a new 13F filed on August 14, seven prominent billionaire money managers sold Nvidia stock during the quarter ending in June (the total number of shares sold is in parentheses).
The investors include Ken Griffin of Citadel Advisors (9,282,018 shares), David Tepper of Appaloosa (3,730,000 shares), Stanley Druckenmiller of Duquesne Family Office (1,545,370 shares), Cliff Asness of AQR Capital Management (1,360,215 shares), Israel Englander of Millennium Management (676,242 shares), Steven Cohen of Point72 Asset Management (409,042 shares), and Philippe Lafon of Coatue Management (96,963 shares).
Eight billionaire investors sold shares in Nvidia in the March quarter (nine, including Jim Simons of Renaissance Technologies, who died in May), and a select eight billionaires sold shares in the December quarter.
While profit-taking after a stock market surge is a logical explanation for the billionaire investors' exodus, there are nearly a half-dozen other factors that could shed more light on why money managers keep heading for the exits.
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5 reasons billionaires can't stop selling their NVIDIA shares
A look at history might provide the most obvious reason why billionaires are steadily moving to the sidelines: Every next-gen technology and trend in the past 30 years has survived an early-stage bubble.
In other words, investor expectations regarding the adoption and utility of hyped innovations and trends from the past 30 years are far outstripping reality. With most companies lacking a clear blueprint for how to generate positive returns from their AI investments, AI is poised to become the next big thing: a booming bubble. When the AI bubble bursts, arguably no stock will be hit harder than Nvidia.
The expectation of a significant increase in competition could be another reason for the billionaire to sell his Nvidia shares: Given the huge market for AI, many outside competitors are entering the market with their own AI-GPUs.
Additionally, Nvidia's top four net sales customers are developing AI chips in-house for their own data centers. These complementary chips minimize Nvidia's hardware “footprint” in high-computing data centers.
Third, billionaires are wisely not overlooking the caps set by regulators. In 2022, and again in 2023, U.S. regulators imposed export restrictions on Nvidia's high-performance AI chips to China. Following the first restrictions in 2022, Nvidia developed its pared-down H800 and A800 chips for China, the world's second-largest economy. Unfortunately, these GPUs were added to the export restriction list last year. These restrictions could reduce Nvidia's quarterly sales by billions of dollars.
NVDA stock insider selling data from YCharts.
A fourth factor behind the continued billionaire selling may have to do with the lack of buying by company insiders: There have been no open market purchases of NVIDIA shares by executives or directors since December 2020. Meanwhile, CEO Jensen Huang has been selling large amounts of the company's stock since mid-June.
While not all insider selling is bad news (some of it may be for tax purposes), the complete lack of buying activity suggests that no one at Nvidia's top brass thinks the stock is worth it.
Finally, NVIDIA's valuation is a sore point: While the company's forward price-to-earnings (P/E) ratio suggests the stock may actually be undervalued, the company's trailing-twelve-month (TTM) price-to-sales (P/S) ratio reached levels in June that rival the TTM P/S peaks of the likes of Cisco Systems and Amazon before the dot-com bubble burst.
Despite all the excitement around artificial intelligence, the behavior of some of Wall Street's smartest investors seems to suggest trouble lies ahead.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, serves on The Motley Fool's board of directors. Sean Williams invests in Amazon. The Motley Fool invests in and recommends Amazon, Cisco Systems, and NVIDIA. The Motley Fool has a disclosure policy.
