10 Stocks Hedge Funds Are Crazy About Right Now

5. NVIDIA Corporation (NASDAQ:NVDA)

Number of Hedge Fund Investors In Q1 2024: 186

NVIDIA Corporation (NASDAQ:NVDA) is the darling of Wall Street and the tech world right now. Key to the firm’s success, particularly in the AI sphere, is its CUDA platform which enables customers to speed up their computing applications solely on NVIDIA Corporation (NASDAQ:NVDA)’s platform. CUDA, along with leading edge chip manufacturing technologies from chip contract manufacturer TSMC, are NVIDIA Corporation (NASDAQ:NVDA)’s key moats as they help ensure that its products are industry leaders in performance despite similar silicon being available from both Intel and AMD.

NVIDIA Corporation (NASDAQ:NVDA)’s competitive moat and the potential for its largest customers like Alphabet and Microsoft to develop their own AI chips was also on the mind of well known investment firm Harding Loevner in its Q1 2024 investor letter. A classic contrarian move, Loevner exited its NVIDIA Corporation (NASDAQ:NVDA) stake in the quarter, and its note mentions key reasons such as difficulty in estimating the “ultimate size of the total addressable market.” The full note is too long to share here and merits a complete read. Here’s one relevant snippet:

While NVIDIA is expected by many to capture the lion’s share of this market for years to come, history tells us that it becomes increasingly difficult for a stock to outperform when expectations are so high. At the advent of the commercial internet, Cisco Systems, which makes the networking equipment that enables much of the internet, occupied a similarly strategic vantage point for the new era. By March 2000, it was the world’s most valuable company. Cisco and its investors were right about the internet: it did change everything. The company’s routers remain a key piece of infrastructure. However, Cisco’s stock price tumbled 88% from its peak and took 20 years to recover. The earnings growth implied by the price investors were willing to pay took longer to arrive than the novelty of the technology took to capture their imagination.

NVIDIA is not Cisco, but its share price suggests that investors may be overestimating the durability of the company’s market position. Warren Buffett once wrote that “the key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” One threat to NVIDIA’s competitive advantage comes from its own client base, as some key customers begin to invest in backward integration.