Billionaires are selling out and buying these two artificial intelligence (AI) hypergrowth stocks instead.

By | April 1, 2024

For the better part of thirty years, there has been no shortage of next-big-thing investments that have captured the attention of professional and everyday investors. Since the arrival of the Internet in the mid-1990s completely changed the course of events, nothing has made as much waves on Wall Street as the artificial intelligence (AI) revolution.

With AI and the integration of machine learning (ML), software and systems have the ability to learn and become more proficient at their tasks over time. The broad reach of AI across virtually every sector and industry is why PwC analysts believe it could add more than $15 trillion to global gross domestic product by the turn of the century.

A money manager using a smartphone and stylus to analyze a stock chart displayed on a computer monitor.

Image source: Getty Images.

While dozens of stocks have benefited from the AI ​​revolution, none have seen a more immediate increase in their sales and earnings than semiconductor stocks. Nvidia (NASDAQ: NVDA).

This “infrastructure backbone” of the AI ​​revolution is on the chopping block of billionaires

In just over a year, Nvidia has become what I like to call the “infrastructure backbone” of the AI ​​movement. The company’s A100 and H100 graphics processing units (GPUs) have come to dominate high-performance data centers. While estimates vary, Nvidia’s ultra-fast GPUs could make up 90% (or more) of the GPUs deployed in AI-accelerated data centers this year.

This is a company that also enjoys out-of-this-world pricing power on its GPUs. As demand exceeded supply in 2023, revenue costs rose only modestly, while data center sales more than tripled. This is a pretty clear indication that pricing power is responsible for a large portion of Nvidia’s sales and profit spike.

But not everyone is convinced that Nvidia will go a step further. During the quarter ended December, eight prominent billionaire investors cut their stakes in this top-performing megacap, including (total shares sold in brackets):

  • Israel Englander of Millennium Management (1,689,322 shares)

  • Jeff Yass of Susquehanna International (1,170,611 shares)

  • Steven Cohen of Point72 Asset Management (1,088,821 shares)

  • David Tepper of Appaloosa Management (235,000 shares)

  • Philippe Laffont of Coatue Management (218,839 shares)

  • Chase Coleman of Tiger Global Management (142,900 shares)

  • David Siegel and John Overdeck of Two Sigma Investments (30,663 shares)

One of the main reasons to be skeptical about Nvidia’s phenomenal development is that it is driven by GPU scarcity. Now Nvidia will significantly increase its production in the current calendar year, and competitors want it too Advanced micro devices And Intel By rolling out advanced AI GPUs on your own, it’s only logical to expect pricing power to decline.

Perhaps more worryingly, Nvidia’s four largest customers by revenue (40% of total revenue) are all developing their own AI GPUs. This will either reduce their future dependence on Nvidia, as their internal data center chips complement what Nvidia produces, or they can phase out Nvidia’s infrastructure altogether. Be that as it may, it is a worrying development for a highly valued stock.

But while billionaires were busy getting out of Nvidia, they weren’t shy about hitting the buy button on two other hyper-growth AI stocks in the fourth quarter.

A person writing and circling the word A person writing and circling the word

Image source: Getty Images.

CrowdStrike Holdings

The first high-octane AI growth stock that seemed to tickle the whistles of billionaire money managers during the quarter ended December is a cybersecurity company CrowdStrike Holdings (NASDAQ: CRWD). Four highly successful billionaires have increased their funds’ respective holdings in CrowdStrike, including (total shares purchased in brackets):

  • Jeff Yass of Susquehanna International (400,988 shares)

  • Jim Simons of Renaissance Technologies (97,900 shares)

  • David Siegel and John Overdeck of Two Sigma Investments (91,091 shares)

On a macro basis, the cybersecurity industry looks like a surefire growth story for at least the rest of the decade. As companies continue to move their data online and into the cloud, third-party vendors are increasingly being called upon to protect this information from hackers.

Furthermore, cybersecurity solutions can thrive in any economic climate. A bad day for Wall Street or a difficult period for the US economy means nothing to hackers and robots looking to steal sensitive information. Because CrowdStrike is a subscription-driven company that protects end users, it is well positioned to generate predictable cash flow no matter what happens with the economy or the stock market.

On a more company-specific basis, CrowdStrike provides clearly identifiable competitive advantages to its customers and investors. The company’s Falcon security platform is powered by AI and ML. Falcon monitors trillions of events every week, making it smarter and more effective at recognizing and responding to potential threats.

There are a number of key performance indicators that demonstrate CrowdStrike’s appeal to businesses. Even though the platform is not the cheapest, the gross retention rate has been around 98% for several years. Additionally, the company’s net retention rate hasn’t fallen below 119% in more than five years. This means the company’s existing customers are spending at least 19% more on an annual basis.

But the key to CrowdStrike’s success is its ability to upsell existing customers. While a single-digit percentage of customers purchased four or more cloud module subscriptions seven years ago, 64% of customers now have five or more cloud module subscriptions. These additional sales have increased the adjusted gross margin for subscriptions to an impressive 80%!

Snowflake

The second hyper-growth artificial intelligence stock that billionaires bought when they sent Nvidia to the chopping block during the quarter ending in December is a cloud data warehousing company Snowflake (NYSE: SNOW). Similar to CrowdStrike, four billionaire investors stepped up and increased the stakes of their funds, including (total shares purchased in brackets):

  • Ken Griffin of Citadel Advisors (1,985,426 shares)

  • David Siegel and John Overdeck of Two Sigma Investments (1,204,387 shares)

  • Israel Englander of Millennium Management (888,047 shares)

There appear to be two reasons why billionaire asset managers are choosing to buy Snowflake stock: opportunity and competitive advantage.

Regarding the former, spending on enterprise cloud and AI solutions/applications within the cloud is still in the early stages of its expansion. Buying shares of Snowflake gives investors a way to get in on the rapid growth of enterprise cloud and AI.

The other reason billionaires are likely stacked in Snowflake is because of its clearly defined competitive advantages. For example, Snowflake’s infrastructure is layered on top of the leading cloud infrastructure service platforms. While data sharing can be challenging between competing cloud platforms, it is seamless for Snowflake’s customers.

Likewise, Snowflake is not dependent on subscriptions. Instead, it charges customers based on the data they store and the Snowflake Compute Credits they use. This transparent pricing policy seems to really resonate with users.

The only problem with Snowflake is the company’s valuation. Don’t get me wrong, CrowdStrike is trading at a huge premium but has seen sales remain robust. Snowflake’s revenue growth has slowed from an estimated 22% three years ago in the current fiscal year. Snowflake is also valued at 115 times forward-adjusted earnings, which is an even tougher pill to swallow for a company that has seen its revenue growth slow from the triple digits.

While Snowflake appears to have a bright future, it may take some time for its operating performance to grow to its current valuation.

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Sean Williams has positions at Intel. The Motley Fool holds positions in and recommends Advanced Micro Devices, CrowdStrike, Nvidia, and Snowflake. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

Forget Nvidia: Billionaires Are Selling It and Buying These Two Hypergrowth Artificial Intelligence (AI) Stocks Instead was originally published by The Motley Fool

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