Thirty years ago, the advent of the internet forever changed the growth trajectory of American companies. Since then, investors have been waiting for the next game-changing innovation, technology, or trend to rival what the internet did for businesses. After decades of patience, artificial intelligence (AI) seems to have been chosen as the next leap in innovation.
The rise of AI hinges on the use of software and systems to perform tasks typically performed by humans. What gives AI such far-reaching potential is the ability of software and systems to learn and evolve without human intervention. As they become proficient at assigned tasks and acquire new skills, this technology has unlimited potential in the long term.
Image source: Getty Images.
But despite the staggering growth projections surrounding AI — analysts at PwC expect it to add $15.7 trillion to the global economy by 2030 — not everyone on Wall Street is convinced of the technology’s upside.
High-profile billionaire investors sold large amounts of Nvidia (NASDAQ: NVDA ) stock during the quarter ended March, according to Form 13F filings detailing the trading activity of Wall Street’s blue-chip money managers.
Six more prominent billionaires have reduced their Nvidia stakes
While the artificial intelligence craze is widely believed to have driven Wall Street’s major stock indexes to all-time highs, eight successful billionaire money managers chose to sell Nvidia shares during the March quarter. (The number in brackets is the total number of shares sold, adjusted to account for Nvidia’s 1-for-10 stock split in June.)
Philippe Lafon of Coatue Management (29,370,600 shares);
Ken Griffin of Citadel Advisors (24,627,160 shares)
Millennium Management Israel Englander (7,200,040 shares)
Stanley Druckenmiller of Duquesne Family Office (4,415,510 shares)
David Siegel and John Overdeck of Two Sigma Investments (4,208,010 shares)
David Tepper of Appaloosa (3,480,000 shares)
Steven Cohen of Point72 Asset Management (3,045,050 shares)
While simple profit-taking following Nvidia’s impressive stock price rally may explain some of this selling, history and valuation are the more likely catalysts.
As we noted earlier, it has been nearly 30 years since the Internet began to change the growth trajectory of businesses and the U.S. economy. Since then, many of the next big innovations and trends have come and gone. Some of these technologies and trends have been hugely successful in the long term, but all of them endured early bubbles. All new technologies and trends need time to mature, and artificial intelligence is no exception. If the AI bubble does burst, as history suggests, no company will be hit harder than Nvidia.
The story continues
Nvidia will also face increasing competition for GPU space in high-computing data centers. What the optimists seem to overlook is that even if Nvidia maintains its computing dominance, it will not be able to meet overwhelming demand and competitors will grab market share.
Additionally, four of the company’s major customers (all members of the “Magnificent Seven”) are developing AI-GPUs for their own data centers. These in-house developed chips don’t offer the same compute advantage as Nvidia’s H100 GPUs, but they’re cheaper and take up valuable data center space.
The clincher is that Nvidia’s trailing-twelve-month (TTM) price-to-sales multiple (P/S) is comparable to the peak TTM P/S multiples recorded by market leaders such as Cisco Systems Inc. and Amazon Inc. before the dot-com bubble burst.
What’s really interesting is that while these prominent billionaire money managers were selling off Nvidia shares, they were buying into two fast-growing stocks that have little to nothing to do with AI.
Image source: Getty Images.
Plug power
The first hypergrowth stock to catch the attention of the billionaire asset managers who have been selling Nvidia shares is hydrogen fuel cell solutions company Plug Power (NASDAQ: PLUG). All three of the billionaires who sold Nvidia shares bought Plug Power shares in the first quarter (total number of shares purchased is in parentheses).
Ken Griffin of Citadel Advisors (3,800,039 shares)
Philippe Laffont of Coatue Management (3,439,975 shares);
Millennium Management’s Israel Englander (546,925 shares)
Plug Power’s appeal as an investment is its strong potential for renewable energy tied to transportation and infrastructure. Management believes the company can achieve $20 billion in sales by 2030, which is an impressive growth rate considering the company is expected to report full-year 2023 sales of $891 million.
Plug Power is currently working to expand its green hydrogen network, which includes improving supply chain efficiencies, increasing prices across its product and services portfolio and significantly improving profit margins.
But despite its rapid growth prospects, Plug Power’s future is very uncertain. Since its inception, the company has been burning cash and has periodically gone public to stay afloat. Last week, Plug announced a $200 million initial public offering, but at a price significantly lower than the previous day’s closing price. With operating losses expected to continue for the next few years, further initial public offerings seem likely.
Plug Power also has to overcome changing sentiment toward clean-energy vehicles. Infrastructure constraints are one reason demand for electric vehicles (EVs) has weakened in recent quarters. EV demand is a proxy for hydrogen fuel-cell vehicle demand, and Plug Power may find the market for its product to be, at best, middling.
Sea Limited
Another fast-growing stock that Nvidia’s billionaire sellers have hit the buy button on is Singapore-based Sea Limited (NYSE: SE). Sea has little to do with artificial intelligence, but five of Nvidia’s billionaire sellers became decisive buyers in the quarter that ended in March, including (total number of shares purchased in parentheses).
Steven Cohen of Point72 Asset Management (1,527,446 shares)
Philippe Laffont of Coatue Management (678,308 shares);
David Siegel and John Overdeck of Two Sigma Investments (338,720 shares)
Ken Griffin of Citadel Advisors (190,432 shares)
What makes Sea such an attractive investment is the rapid growth of its three business segments.
The division that consistently generates positive earnings before interest, taxes, depreciation and amortization (EBITDA) is Sea’s digital entertainment division, known as “Garena.” Garena’s biggest driver is Free Fire, one of the most popular mobile games in the world. In Q1, Garena had approximately 595 million quarterly active users, of which 8.2% paid to play games. This pay-to-play ratio is significantly higher than the industry average for mobile games.
Sea’s second fastest growing segment is its digital financial services business, SeaMoney. Many of the countries in which Sea operates are chronically underbanked, meaning businesses and consumers lack access to basic financial services. SeaMoney provides a solution to this problem – loans – which is prevalent in Southeast Asia.
But the most promising of all business segments is Shopee, an e-commerce platform that operates in Southeast Asia and Brazil. The platform saw $23.6 billion in gross merchandise volume (GMV) in the first quarter, equating to $94.4 billion on an annualized run-rate basis. To get an idea of how fast Shopee is growing, remember that its GMV for all of 2018 was $10 billion.
If these three business segments continue to perform well, Sea Limited could sustain annual sales growth of 15% (or higher) and achieve triple-digit annual earnings growth through 2028, according to Wall Street consensus forecasts.
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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 has investments in and recommends Amazon, Cisco Systems, Nvidia, and Sea Limited. The Motley Fool has a disclosure policy.
Forget NVIDIA: High-profile billionaires are selling it and investing in two fast-growing stocks that have little to do with artificial intelligence (AI). This article was originally published by The Motley Fool.
