Earlier this week, the most important data release of the quarter occurred. Monday, Aug. 14, marked the last day for money managers with at least $100 million in assets under management to file Form 13F with the Securities and Exchange Commission.
A 13F provides an under-the-hood snapshot for investors of what Wall Street’s brightest minds were buying, selling, and holding in the most recent quarter. In other words, it’s a detailed roadmap of the stocks and trends that are captivating the attention of the most-successful investors.
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What’s perhaps most interesting about the latest round of 13Fs is how billionaire money managers approached Wall Street’s next-big-thing investment, artificial intelligence (AI). AI involves using software and systems to handle tasks usually assigned to humans. Based on a report from PwC, AI has the potential to increase global gross domestic product by $15.7 trillion, as of 2030.
Despite being a game-changing innovation that has broad-sector appeal, the near-term outlook for artificial intelligence stocks is mixed. During the second quarter, two AI stocks were aggressively sold by billionaire investors, while another industry leader was bought hand over fist.
Artificial intelligence stock No. 1 billionaires can’t stop selling: Tesla
The first AI-inspired stock that saw some significant selling pressure from billionaire investors during the second quarter is electric-vehicle (EV) manufacturer Tesla (TSLA -3.16%). Despite Tesla incorporating AI technology into its various automated driver assistance systems, three billionaires were busy pressing the sell button:
- Israel Englander at Millennium Management
- Jim Simons at Renaissance Technologies
- Jeff Yass at Susquehanna International
In the same order they’re listed above, these billionaires respectively oversaw the sale of approximately 2.46 million shares, 1.93 million shares, and 759,400 shares of Tesla stock. The sale by Millennium represented almost its entire stake.
The core reason why billionaire investors are pulling the plug on Tesla likely has to do with the company’s declining operating margin. Though Tesla has the clear EV market share advantage in the U.S. and internationally, it’s aggressively reduced the purchase price of its key models on at least a half-dozen occasions since the year began.
CEO Elon Musk has been clear that his company’s pricing strategy reflects demand for its EVs. Ergo, double-digit percentage declines in the sale price of the top-selling Model Y SUV and Model 3 sedan reflect weaker demand for these models. As the average sales price of its EVs falls, so will the company’s automotive gross margin.
Another potential issue for Tesla is its leadership. In addition to being an innovator, Elon Musk is an unquestioned distraction. His ownership of the social media site formerly known as Twitter has clearly taken his attention away from Tesla. Further, he’s promised a laundry list of innovations that haven’t been fulfilled.
Lastly, billionaires may simply be unwilling to pay up for Tesla. Though Tesla has other revenue channels, including energy storage and its supercharger network, these are generally low-margin ventures. At its heart, Tesla is an auto stock that’s trading at a staggering 70 times Wall Street’s consensus earnings in 2023. Most auto stocks are valued at a high-single-digit earnings multiple.
Artificial intelligence stock No. 2 billionaires can’t stop selling: Palantir Technologies
The second AI stock billionaire money managers were aggressively selling during the second quarter is data-mining specialist Palantir Technologies (PLTR 0.52%). All told, five prominent billionaires headed for the exit, including:
- Ken Griffin of Citadel Advisors
- Philippe Laffont of Coatue Management
- Israel Englander of Millennium Management
- Jim Simons of Renaissance Technologies
- Jeff Yass of Susquehanna International
Listed in the same order as above, these five billionaires respectively disposed of roughly 3.33 million shares, 2.17 million shares, 1.57 million shares, 814,600 shares, and 754,800 shares of Palantir stock in the June-ended quarter. Coatue completely exited its position, while Citadel sold all but 11,369 shares.
The most logical explanation for this selling looks to be Palantir’s valuation. During periods of economic uncertainty, investors are often hesitant to pay significant premiums for potentially cyclical tech companies. As of the closing bell on Aug. 14, investors were paying 15 times sales and about 71 times Wall Street’s consensus adjusted earnings for 2023. That’s an aggressive valuation for a company slated to deliver “only” 16% sales growth this year and approximately 19% revenue growth in 2024.
However, Palantir is unique. While I’m not justifying paying 71 times forecast earnings this year, the company’s operating model can’t be duplicated at scale. Its Gotham platform is utilizing AI and machine learning to help governments collect data and plan missions. Meanwhile, Foundry is a next-generation platform fully capable of helping businesses make sense of big batches of data to streamline their operations. Without a true replacement at scale, some degree of premium is warranted.
Palantir also enjoys a level of cash-flow predictability that other fast-growing tech companies may lack. Many of its government-based contracts last for four or five years. When coupled with an adjusted gross margin of around 80% and a debt-free balance sheet that sports $3.1 billion in cash, cash equivalents, and short-term Treasuries, there’s added evidence that Palantir deserves a premium.
Time will tell if these five billionaires made a prescient or regrettable decision to sell or pare down their positions.
Image source: Getty Images.
The AI stock billionaire investors are buying hand over fist: Nvidia
However, not all AI stocks were on the chopping block during the second quarter. Interestingly enough, the highflier of the bunch, Nvidia (NVDA -1.03%), is the AI stock billionaires couldn’t stop buying. In total, 10 billionaires were busy mashing the buy button, including:
- Jeff Yass at Susquehanna International
- Jim Simons at Renaissance Technologies
- Israel Englander at Millennium Management
- David Tepper at Appaloosa Management
- Steven Cohen at Point72 Asset Management
- Stephen Mandel at Lone Pine Capital
- John Overdeck and David Siegel at Two Sigma Investments
- Chase Coleman at Tiger Global Management
- Dan Loeb at Third Point
As they’re listed above, these billionaires respectively oversaw the purchase of approximately 5.4 million shares, 1.85 million shares, 1.02 million shares, 870,000 shares, 662,400 shares, 661,600 shares, 629,100 shares, 584,700 shares, and 500,000 shares of Nvidia stock.
What Nvidia brings to the table is a tangible way to take part in the hype surrounding AI. While most addressable markets for AI solutions remain theoretical, Nvidia’s AI-inspired graphics processing units (GPUs) are the cornerstone of high-compute data centers. Nvidia’s A100 and H100 GPUs may be able to corner around 90% of high-compute GPUs in use in 2024.
Unsurprisingly, Nvidia’s total sales are estimated to more than double in fiscal 2025 ($59.1 billion) from the $27 billion reported in fiscal 2023. Nvidia’s fiscal year ends in late January.
While Nvidia has been nothing short of a slam-dunk investment for the bulls through the first seven months and change of 2023, it’s not yet clear if the company can maintain its momentum. Competition should be fierce among GPU producers in high-compute data centers by mid-decade, and U.S. regulators aren’t exactly rolling out the red carpet for Nvidia.
Last year, U.S. regulators clamped down on exports of the company’s high-powered AI GPUs to China, which coerced Nvidia to develop the slower A800 and H800 GPUs. But even after making this adjustment, officials may further reduce the company’s ability to export its top-selling data-center GPUs to China. This could be problematic, given that China represents a meaningful portion of sales for Nvidia.
A historic multiple expansion could also spell trouble for the 10 billionaire investors that piled into Nvidia. The company was already trading at an average multiple of 59 times cash flow over the trailing five years, as of the end of 2022. After tripling in 2023, it’s now commanding a price-to-cash-flow multiple of nearly 228 on a trailing-12-month basis. Historically, it’s been virtually impossible for companies to sustain this magnitude of multiple expansion.
