1 AI Stock Billionaires Are Scooping Up

To say that NVIDIA (NASDAQ:NVDA) has been on a tear this year would be an understatement. The stock has risen by more than 214 percent YTD, and the run may not be over yet.

In addition to retail investors, many large hedge funds are putting their capital to work in this dominant AI chip company. We explore why hedge funds and billionaires are buying Nvidia in spades?

Who’s Buying NVIDIA?

NVIDIA appears in the portfolios of several prominent billionaire investors. Among these are Jim Simons of Renaissance Technologies, David Tepper of Appaloosa Management and Israel Englander of Millennium Management. 

Notably, Tepper has continued to acquire shares as the price of the stock skyrocketed over the course of this year. In Q2, the famous investor expanded his previous holdings of NVIDIA by nearly 600 percent by adding 870,000 shares to his portfolio.

This suggests that the noted hedge fund manager still believes NVIDIA to be a good value even after its run-up in the first half of 2023.

NVIDIA’s Recent Performance

NVIDIA’s stratospheric stock run has coincided with significant improvements in the underlying business. In Q2, for instance, total revenue rose 88 percent year-over-year to hit a record of $13.5 billion. Data center revenue was particularly fast-growing, having increased by over 170 percent YoY. 

Revenue isn’t the only core business metric that NVIDIA has massively improved in the past year. Gross margin has risen 26.6 points to 70.1 percent, while net income increased 843 percent to $6.2 billion.

Earnings per share increased by over 850 percent to reach $2.48. In the coming 12 months, earnings are projected to grow by another 49.9 percent.

Is NVIDIA Overpriced?

One of the most common concerns regarding NVIDIA is its apparent overvaluation. With a price tag of 56.2 times forward earnings, 34.8 times sales and 4.2 times projected earnings growth, it’s not difficult to see why value investors shy away from the stock.

Even more worrying for value investors is the stock’s price-to-cash-flow ratio, which is an astonishingly high 147.9. This negative view, however, may fail to account for NVIDIA’s long-term growth potential.

Over the next five years, the company’s earnings are expected to grow at a compounded annual rate of roughly 42 percent.

Using the most recent full fiscal year’s earnings of $4.14 per share, this would put NVIDIA’s EPS at nearly $24 per share on a five-year time horizon. In this case, NVIDIA’s current price would be under 20 times its eventual projected earnings. 

It should be noted, however, that sustaining 42 percent year-over-year growth is an extremely difficult feat. If NVIDIA’s growth plateaus or its earnings shrink at any point during the next few years, the stock’s value could correct sharply downward.

As such, investors must understand that NVIDIA shares are currently trading at a premium that likely prices in a best-case growth scenario. 

NVIDIA’s Competitive Position

One factor that may work in NVIDIA’s favor is its extremely desirable competitive position. The company’s share of the GPU market is currently 84 percent, making it difficult for competitors to break NVIDIA’s grip on the industry. In specialized AI chips, NVIDIA maintains a similar advantage with an estimated market share of 80 percent. 

NVIDIA is also continuing to innovate in ways that will give it a long-term moat. One of the most important developments for the company recently has been a breakthrough in computational lithography that NVIDIA claims is 40 times faster than existing systems.

This should give it a significant edge in designing and producing new chips, potentially allowing NVIDIA to beat other chip producers on both prices and lead times. 

With all of this said, NVIDIA cannot afford to ignore the fierce competition that is emerging in the semiconductor world. AMD, in particular, could emerge as a major contender in this rapidly growing industry. As such, NVIDIA’s moat will likely be tested repeatedly over the coming years.

China vs US Trade Is a Black Swan

Beyond the high price tag investors must pay for NVIDIA shares, the company is also subject to a variety of potential business risks. Among the most important of these is the increasingly tense nature of technological trade between the US and China.

Despite being a potentially massive market for advanced semiconductors, China may soon be effectively cut off from the best American chips. NVIDIA has publicly warned of permanent losses to itself and other domestic producers if trade tensions continue to escalate. 

NVIDIA share prices may also suffer in the short term if investor interest in AI stocks cools down. While NVIDIA and other tech stocks have powered the start of a new bull market this year, there’s no guarantee that investors will continue paying higher prices for them.

Morgan Stanley analysts already project that the AI stock surge could be nearing its end. While NVIDIA would likely prove more resilient than many other tech companies in the event of a selloff, it’s difficult to imagine that waning investor sentiment on AI would not have a negative impact on its share prices.

Is NVIDIA a Buy?

With many billionaire investors holding large positions in NVIDIA, it’s difficult to ignore the company. However, the stock’s current pricing also suggests that it may be overvalued. Even with the company’s high potential for growth, any speed bumps along the way could trigger a selloff or cause the stock’s price to plateau. 

Despite these concerns, analysts remain generally bullish on NVIDIA. The current consensus price forecast for the next year places the stock at $615, implying an upside of 33.7 percent from the most recent price of $460.03.

Although analyst forecasts are never definitive, the weight of Wall Street opinion and the roster of highly successful investors buying the stock suggests that the smart money is firmly on NVIDIA’s side.

Ultimately, risk-tolerant investors looking for market-beating returns may want to consider adding a small NVIDIA position to their portfolios. Even with the prospect of overvaluation, the market’s enthusiasm for NVIDIA and the company’s projected earnings growth could both drive it well above its present level.

While it’s likely unwise to risk too much on NVIDIA at this time, a smaller position may allow investors to capitalize on the stock’s potential gains while keeping overall portfolio risk to a minimum. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.