For three decades, investors have been patiently waiting for the next great innovation to come along that would rival what the internet did for corporate America. The arrival of artificial intelligence (AI) might be just what the doctor ordered.
Artificial intelligence allows software and systems to oversee tasks that humans would normally undertake. The key to AI's seemingly limitless potential is that software and systems have the capacity to learn without human intervention. This gives the technology utility in pretty much every facet of the U.S. and global economy.
Though growth estimates are all over the map, the most eye-popping forecast comes from the analysts at PwC, who believe AI can add an estimated $15.7 trillion to the global economy by the turn of the decade. With dollar figures this immense, it's not a surprise that Wall Street's smartest and richest money managers have been piling into AI stocks.
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But what might come as a shock is that leading AI company Nvidia (NVDA 4.55%), which has gained nearly $3 trillion in market value since the start of 2023, has been a top sell candidate for more than a half-dozen billionaire money managers.
Nvidia has been shown the door by a number of Wall Street's prominent billionaire investors
Thanks to quarterly filed Form 13Fs with the Securities and Exchange Commission, everyday investors have the ability to track what Wall Street's top money managers are buying and selling. The March-ended quarter saw eight billionaires -- nine if you include the recently passed Jim Simons of Renaissance Technologies -- dump shares of Nvidia stock. However, the three most-prominent billionaire sellers were (total shares sold in parenthesis have been adjusted for Nvidia's 10-for-1 stock split in June):
- Philippe Laffont of Coatue Management (29,370,600 shares)
- Ken Griffin of Citadel Advisors (24,627,160 shares)
- Israel Englander of Millennium Management (7,200,040 shares)
While profit-taking is a viable reason that could explain why prominent billionaire asset managers sent Nvidia to the chopping block during the first quarter, there are a few other headwinds that may have encouraged this exodus.
To begin with, Nvidia will almost certainly face increasing competition in the coming quarters. Advanced Micro Devices is ramping up production of its MI300X graphics processing unit (GPU) for high-compute data centers, and Intel is launching its Gaudi 3 AI-accelerating chip during the current quarter.
Moreover, Nvidia's four largest customers, which account for approximately 40% of its net sales, are developing in-house AI-GPUs of their own. The problem for Nvidia is that, even if maintains its compute advantages and develops next-generation AI-GPU architecture that outpaces its rivals, the mere presence of other chips reduces data center space for Nvidia's hardware. It also limits the AI-GPU scarcity that's driven its pricing power into the heavens.
Perhaps the most damning factor of all might just be that no buzzworthy innovation, technology, or trend over the last 30 years has escaped an early stage bubble. History shows that investors always overestimate the uptake and utility of new technologies, which makes it likely that AI will follow suit. If the AI bubble were to burst, Nvidia's stock would likely be hit hard.
But while these top billionaire investors were busy sending shares of Nvidia to the chopping block, they were piling into three surprising value stocks.
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Philippe Laffont: PayPal Holdings (8,014,159 shares purchased)
Nvidia's biggest billionaire seller undeniably had eyes for the leading financial technology (fintech) stock during the first quarter. Coatue Management's 13F notes that the fund picked up more than 8 million shares of PayPal Holdings (PYPL 0.25%), 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 grew by 11% in the March quarter to 6.5 billion, while total payment volume has sustained a double-digit growth rate, sans currency movement.
Furthermore, the company's active accounts are more engaged than ever. Though active account growth has stalled in recent quarters, the average payments completed by active accounts over the trailing-12-month period has increased from 40.9 at the end of 2020 to 60 on the nose, as of the end of March 2024. Since this is primarily a usage-driven platform, higher engagement is a recipe for an increase in gross profit.
With Wall Street's consensus calling for nearly 16% annualized earnings 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 inception, which is overseen by billionaire Ken Griffin, opted to trade out shares of Nvidia for time-tested financial institution Bank of America (BAC 1.35%).
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-hiking cycle since the early 1980s might not have been well received by borrowers, but it's been a godsend for lenders like BofA. The longer the nation's central bank stands pat on interest rates, the more net-interest income BofA and its peers can collect.
Bank of America also deserves plenty of credit for its technological prowess. While it might not be the first company you think of when it comes fintech innovation, BofA's digitization efforts are paying off. A whopping 76% of consumer households were banking online or via mobile app in the first quarter, and exactly half of all loan sales were completed digitally. Digital transactions are considerably cheaper than in-person interactions and will, over time, improve Bank of America's operating efficiency.
A forward P/E ratio of a little over 11 suggests that 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 pharmaceutical company Merck (MRK 0.04%) that proved to be the apple of his and his investment team's eye during the March-ended quarter.
If there's a primary lure to 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 run-rate revenue. With constant-currency sales growth of 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 anywhere near enough attention is its Animal Health segment, which accounts for almost 10% of the company's net sales. Between keeping livestock healthy and the willingness of pet owners to spend a small fortune on the well-being of their furry, feathered, gilled, and scaled family members, Merck's pet division provides a steady growth foundation.
With sustained double-digit earnings per share (EPS) growth expected, Merck's forward P/E of 13 continues to look like a value.
