1. NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Investors In Q2 2024: 179
Gotham Asset Management’s Q2 2024 Stake: $192 million
NVIDIA Corporation (NASDAQ:NVDA) is the stock market’s top stock when it comes to artificial intelligence. The firm’s competitive moat is based on its GPU design, as NVIDIA Corporation (NASDAQ:NVDA)’s chips are widely perceived to be the best of breed in the industry. This has led to an insatiable demand for NVIDIA Corporation (NASDAQ:NVDA)’s GPUs, so much so that it has made the firm’s revenue grow from $16.7 billion in 2021 to $79.7 billion on a trailing twelve month basis. This marks a 377% growth on an absolute basis, and during the same time period, NVIDIA Corporation (NASDAQ:NVDA)’s shares have appreciated by 299%, after having trimmed their gains since July. By July, the stock had appreciated by 339%, before NVIDIA Corporation (NASDAQ:NVDA) shared its results for the second quarter of fiscal 2025. Since its hypothesis depends solely on its GPUs, NVIDIA Corporation (NASDAQ:NVDA) is vulnerable to any inventory disruptions or gluts since it has few alternatives to rely on for revenue. At the same time, its technological strength means that any GPU alternatives from other firms can be hard to come by, making the world continue to be dependent on NVIDIA Corporation (NASDAQ:NVDA) for the best GPUs.
Baron Funds mentioned NVIDIA Corporation (NASDAQ:NVDA) in its Q2 2024 investor letter. Here is what the fund said:
“More recently, however, we’ve entered the period of doubts and questioning, some of which is real and normal in the first stages of a new paradigm, and some of which is prompted by short sellers. Given the explosive returns of NVIDIA and other AI leaders, AI bears and fear mongers have been comparing the current AI market winners with the internet bubble of the late 1990s/early 2000s, and NVIDIA’s stock move today with Cisco’s back then. First, while many stocks were trading at nosebleed valuations and on made up metrics (such as price per eyeballs) before the bursting of the internet bubble, as we’ve said many times, the internet proved to transform our world and create the digital age we are now living in. Second, while NVIDIA’s stock price inflection has been nothing short of unprecedented for a company of its size, it was fueled almost entirely by explosive growth in revenues, earnings, and cash flows– not multiple expansion. Over the last 12 months, NVIDIA’s stock has eectively tripled, but its forward P/E multiple has remained essentially flat, because NVIDIA blew away Wall Street expectations despite being covered by over 60 sell-side analysts, who have increased their forward projections every single quarter. In my career, the only comparative analogue is when Apple first introduced the iPhone and stunned Wall Street with its growth. In contrast, most of Cisco’s move in the late 1990s was due to multiple expansion. At its peak, Cisco traded at a P/E ratio over 130 times, more than quadruple its five-year average of 37 times. At the end of the second quarter, NVIDIA traded at a P/E ratio of 40 times, equal to its five-year average, and at a P/E to growth (or PEG) ratio for 2025 of 0.8 times, as consensus expectations are for NVIDIA to grow earnings per share 40% next year.
Moreover, investor concerns have arisen about the financial impact AI is having and whether surging capital expenditures (capex) across the technology landscape, particularly the large cloud players (Microso, Google, Amazon, and Meta), known as the hyperscalers, will be justified and earn reasonable returns on invested capital (ROIC). First, the adoption and penetration of new technology typically traces a classic S-curve–or more precisely, in our view, a series of S-curves or phases. For at least the past year and a half, we’ve been in what might be called the AI infrastructure- build phase – building the AI factories, as NVIDIA CEO Jensen Huang has articulated it, and this phase has been dominated by the infrastructure- layer players – the accelerated computing chips suppliers like NVIDIA and Broadcom, as well as data center, cloud infrastructure and energy companies. The hyperscalers, other enterprises, and sovereign entities investing ahead understand that if you want to be in the AI game, you must invest now – build the infrastructure, build the factories – or else you’ll find yourselves disrupted on the sidelines or playing catch up in the biggest game, the most important race in a technology generation. Only those who invest today even have the chance to be the winners of the future.”
NVDA’s magic also makes it the best magic formula stock according to Joel Greenblatt’s hedge fund’s investments. But our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
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