Billionaire investing titans are loading up on one artificial intelligence (AI) stock that has spearheaded the S&P 500's impressive 9 percent rally since January.
That includes hedge fund managers Stanley Druckenmiller and David Tepper (worth a combined $25 billion) who are both loading up on Nvidia (NVDA) - one of the top-performing companies in the S&P for the second quarter of 2023.
Nvidia is a leading graphics processing units (GPUs) manufacturer that specializes in the microchips needed for building, training, and deploying AI. In the past six months, its stock price has steadily increased by almost 100%, in part thanks to these investors' votes of confidence.
Druckenmiller's Duquesne Family Office purchased more than 200,000 additional shares of NVDA this quarter for a total investment of $220 million.
Tepper's Appaloosa Management also bought an additional 150,000 shares of NVDA valued at approximately $41.7 million.
NVDA prices have climbed almost 95% in the past six months, in spite of negative market sentiment surrounding interest rate hikes, impending recessions, and tech layoffs.
This is partly thanks to Microsoft and OpenAI-the company that launched ChatGPT and subsequently received $10 billion from Microsoft-both using Nvidia GPUs to develop new AI tech.
(Duquesne Family Office also invested more in Microsoft this quarter upping their total stake to $2.3 billion, ten percent of their U.S. equity portfolio.)
Given its stock performance and contributions to AI, it's no wonder Nvidia is a top buy for billionaires.
And while I'm also optimistic about NVDA's long-term profit potential, I'm concerned its current position is overvalued.
The metric that concerns me most is Nvidia's price-to-earnings ratio, which is how much investors are willing to pay per dollar of earnings.
Right now, Nvidia has an exceptionally high average P/E ratio at approximately 64 over the past five years. By comparison, the S&P 500 trades at an average P/E of 24.
This puts Nvidia as the sixth highest-valued company in the world despite pulling in significantly less revenue than companies of similar size. Amazon, the fifth highest-valued company, made approximately $500 billion in 2022. 25X more than Nvidia's $22 billion.
This abnormally high P/E, even for an AI company, could indicate overvaluation for NVDA. Its upcoming earnings call will need to be perfect, or I can see the NVIDIA stock sharply reversing due to a shift in market sentiment.
I'd imagine that some investors may even trim their NVDA exposure ahead of its next earnings call scheduled for Wednesday, May 24 after the market closes.
Regardless of its stock price performance post-earnings, NVDA is still an excellent company with a strong growth and profitability profile given its sustained demand in the AI microchip market.
Assuming its earnings report isn't perfect, I think a post-earnings price dip would be the primetime entry point for investors looking to open a position.
However, Nick Black has an alternative AI investment available for you.
His Digital Heavyweights collected a 214% return from this pick from July to February. Since then, its price has reduced by more than 50%, giving you a second chance to get in on the gains.
The best part? You can unlock Nick's top AI pick for free.
Talk soon,
Alex Kagin
Director of Technology Investing Research, Money Map Press
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