For three decades, investors have been patiently waiting for the next big innovation to come along that would rival what the Internet did for corporate America. The advent of artificial intelligence (AI) may be just what the doctor ordered.
Artificial intelligence allows software and systems to oversee tasks that humans would normally perform. The key to AI’s seemingly limitless potential is that software and systems have the capacity to learn without human intervention. This lends technology utility to nearly every aspect of the American and global economy.
Although growth estimates are all over the map, the most eye-catching forecast comes from analysts at PwC, who believe AI could add an estimated $15.7 trillion to the global economy by the end of the decade. With dollar figures this big, it’s no surprise that Wall Street’s smartest and richest money managers have piled into AI stocks.
But what may be shocking is that leading AI company Nvidia (NASDAQ: NVDA)which has gained nearly $3 trillion in market value since the start of 2023, has been at the top sell candidate for more than half a dozen billionaire money managers.
Nvidia has been shown the door by a number of well-known billionaire Wall Street investors
Thanks to the 13F form filed quarterly with the Securities and Exchange Commission, everyday investors have the ability to track what top Wall Street money managers are buying and selling. The last quarter of March saw eight billionaires — nine, if you include recently approved Jim Simons of Renaissance Technologies — dump Nvidia stock. However, the three most notable billionaire sellers were (total shares sold in parentheses are adjusted for Nvidia’s 10-for-1 stock split in June):
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Philippe Laffont of Coatue Management (29,370,600 shares)
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Ken Griffin of Citadel Advisors (24,627,160 shares)
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Israel Englander of Millennium Management (7,200,040 shares)
While profit-taking is a solid reason that could explain why well-known billionaire asset managers sent Nvidia to the chopping block during the first quarter, there are several other headwinds that may have encouraged this exodus.
For starters, Nvidia will almost certainly face increased competition in the coming quarters. Advanced Micro Devices is ramping up production of its MI300X graphics processing unit (GPU) for high-computing data centers, and Intel is launching its AI-accelerating Gaudi 3 chip this quarter.
Additionally, Nvidia’s four largest customers, which account for roughly 40% of its net sales, are developing their own in-house AI GPUs. The problem for Nvidia is that, even if it maintains its computational advantages and develops next-generation AI-GPU architecture that outperforms its rivals, the mere presence of other chips reduces the data center footprint for Nvidia’s hardware. It also limits the lack of AI-GPU which takes its pricing power to heaven.
Perhaps the most dangerous factor of all may just be that no buzzy innovation, technology or trend of the past 30 years has escaped an early-stage bubble. History shows that investors always overestimate the use and utility of new technologies, which makes it likely that AI will follow suit. If the AI bubble bursts, Nvidia stock is likely to be hit hard.
But while these big billionaire investors were busy sending Nvidia stock to the chopping block, they were piling into three surprisingly valuable stocks.
Philippe Laffont: PayPal Holdings (8,014,159 shares purchased)
Nvidia’s billionaire biggest retailer clearly had its eye on top fintech stocks during the first quarter. Coatue Management’s 13F notes that the fund has received more than 8 million shares of PayPal Holdings (NASDAQ: PYPL)which as of March 31 were worth almost $539 million.
Although competition is increasing among digital payment and peer-to-peer payment providers, most of PayPal’s important user metrics signal continued growth. Payment transactions increased by 11% in the March quarter to ALL 6.5 billion, while the total volume of payments maintained a double-digit growth rate, excluding currency movements.
Additionally, the company’s active accounts are more engaged than ever. Although active account growth has stalled in recent quarters, average payouts made by active accounts over the trailing 12-month period have increased from 40.9 at the end of 2020 to 60 at the end of March 2024. Since then this is primarily a platform driven from usage, higher engagement is a recipe for increased gross profit.
With the Wall Street consensus calling for nearly 16% annual revenue growth through 2028, a forward price-to-earnings (P/E) ratio of less than 13 makes PayPal stock quite the deal.
Ken Griffin: Bank of America (22,434,948 shares purchased)
The world’s most profitable hedge fund since its inception, which is overseen by billionaire Ken Griffin, chose to trade Nvidia shares for a time-tested financial institution Bank of America (NYSE: BAC).
Among America’s largest banks by assets, Bank of America is the most sensitive to changes in interest rates. The Federal Reserve’s most aggressive rate hike cycle since the early 1980s may not have been well received by borrowers, but it has been a godsend for lenders like BofA. The longer the nation’s central bank stays on top of interest rates, the more net interest income BofA and its peers can collect.
Bank of America also deserves a lot of credit for its technological prowess. While it may not be the first company you think of when it comes to fintech innovation, BofA’s digitization efforts are paying off. A whopping 76% of consumer households banked online or via a mobile app in the first quarter, and exactly half of all credit sales were done digitally. Digital transactions are significantly cheaper than in-person interactions and, over time, will improve Bank of America’s operational efficiency.
A forward P/E ratio of just over 11 suggests Bank of America stock is still a bargain for investors.
Israel Englander: Merck (4,021,500 shares purchased)
Although billionaire Israel Englander is known for his love of fast-paced tech stocks, it’s a pharmaceutical company Merck (NYSE: MRK) which proved to be the apple of his and his investment team’s eye during the last quarter of March.
If there’s one major lure for owning Merck stock, it’s Keytruda, the company’s world-leading cancer immunotherapy. Improved cancer screening diagnostics, phenomenal pricing power, increased use in existing indications and label expansion opportunities have put Keytruda on pace for nearly $28 billion in annual revenue. With constant currency sales up 24% in the March quarter, there’s no reason to believe Keytruda’s growth will slow anytime soon.
An unsung hero for Merck that doesn’t get enough attention is its Animal Health segment, which accounts for almost 10% of the company’s net sales. Between maintaining healthy livestock and pet owners’ willingness to spend a small fortune on the well-being of their furry, feathered, gilled and scaly family members, Merck’s pet division provides a solid foundation growth.
With steady double-digit earnings per share (EPS) growth, Merck’s forward P/E of 13 continues to look like a value.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America, Intel and PayPal. The Motley Fool has positions in and recommends Advanced Micro Devices, Bank of America, Merck, Nvidia and PayPal. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 Intel calls, short August 2024 $35 Intel calls, and short September 2024 $62.50 PayPal calls. The Motley Fool has a disclosure policy.
Forget Nvidia: Billionaires Are Dumping It and Plunging into These 3 Surprising Value Stocks Instead was originally published by The Motley Fool