We recently published a list of Hedge Funds are Buying and Selling These 10 AI Stocks. Since NVIDIA Corporation (NASDAQ:NVDA) ranks 3rd on the list, it deserves a deeper look.
The AI-led rally in the stock market is expected to ripple through other sectors and smaller tech companies, but analysts believe for now large-cap companies are still the key focus of money managers. Morgan Stanley in its August key themes report said that while small-cap stocks rebounded on rate-cut hopes, the window for their outperformance is “too narrow.”
“Historically small cap outperformance depended primarily on economic growth acceleration. Greater risk exposure to a “higher-for-longer” rate environment has added inverse rate correlation to the mix. While periods of growth acceleration with lower rates are plausible (e.g. end-2023), we see this combination as relatively unlikely in the current inflation environment. The recent decline in interest rates was a tailwind to small cap stocks, but softer economic data likely limits the durability of this trade,” the firm said.
The latest earnings season showed that ROI on the huge AI spending by major companies is small in the short term, but long-term gains seem promising. Many companies have already started seeing monetization on their AI investments. Goldman Sachs analysts Joseph Briggs, Kash Rangan, and Eric Sheridan said in a June report titled GEN AI: TOO MUCH SPEND, TOO LITTLE BENEFIT? that they remain more optimistic about AI’s economic potential even if we don’t see immediate benefits for now.
Hedge funds are one step ahead of average individual investors due to the sheer scale of resources and capital they have. That’s why it’s always interesting to see which stocks they are buying and selling. In this article we take a look at the 10 most important AI stocks which were on the radar of elite money managers based on their second-quarter filings. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
NVIDIA Corp (NASDAQ:NVDA)
Total Number of Hedge Fund Investors as of the End of Q2: 179
Total Number of Hedge Fund Investors as of the End of Q1: 186
Billionaire Rajiv Jain’s GQG Partners cut its stake in NVIDIA Corp (NASDAQ:NVDA) by 44% during the second quarter, while billionaire DE Shaw’s fund reduced its position by 52%. Billionaire Ken Griffin’s stake in the company fell 80% to $299 million. Billionaire Paul Singer, who recently said NVIDIA Corp (NASDAQ:NVDA) and other top AI stocks are in bubble land, sold his entire stake in the company during Q2.
Analysts are bracing for NVIDIA Corp (NASDAQ:NVDA) earnings scheduled for a release today. Jefferies said in a latest note that the company will smash analyst expectations for the quarter.
“We expect another strong beat in July and strong guidance into October, with beats of about $1B for the results and guide,” analysts said.
Analysts at Jefferies also believe the demand for Nvidia’s Hopper chips is strong.
NVIDIA Corp (NASDAQ:NVDA) shares are on the decline amid valuation concerns. However, Morgan Stanley re-added the stock to its top picks list. Analyst Joseph Moore said:
“Visibility will actually increase as demand moves from Hopper to Blackwell, as the constraint will shift back to silicon; H100 lead times are short, but H200 lead times are already long, and Blackwell should be even longer,” the firm said.
However, the latest big tech earnings have raised some concerns about NVIDIA Corp (NASDAQ:NVDA) future growth trajectory. The company’s major customers including Meta Platforms and Alphabet have indicated that they may be overbuilding and overspending on AI chips. NVIDIA Corp (NASDAQ:NVDA) is selling about 2 million of its GPUs on an annual basis based on 2023 data. As demand moderates and competitors up their production, the company won’t be able to sustain its current growth trajectory.
Raymond James analyst Javed Mirza recently said in a report that NVDA has “triggered a mechanical sell signal” based on a moving average convergence/divergence indicator. In a technical analysis report, he stated that the stock is trading below its 50-day moving average and exhibiting early signs of selling pressure. This, according to Mirza, shows there is a looming corrective phase lasting 1-3 months. He added that a sustained break below the 50-day moving average could lead to a decline towards 94.94, representing a further 16.9% drop from current levels.
Aoris International Fund stated the following regarding NVIDIA Corporation (NASDAQ:NVDA) in its Q2 2024 investor letter:
“If Information Technology was the dominant sector for the quarter, NVIDIA Corporation (NASDAQ:NVDA), which is the largest supplier of microprocessors used for generative AI applications, was the dominant company. NVIDIA’s share price rose by a third in the quarter and has increased by 255% so far this year. Since the beginning of 2023, its market value has risen by 8.3x, or $4.3 trillion, making NVIDIA the third largest company in the world by this measure.
As a result of the unusually strong stock price performance from NVIDIA and a few other large companies, equity markets have become increasingly concentrated. You can see this in the chart below, which shows that on 30 June, 27% of the market value of the 500 largest US companies was attributable to just five companies, more than twice the average of the last 20 years.
The composition of the Aoris International Fund will always be very different to that of the broader equity market. There will be periods, such as the most recent quarter, where this contributes to our performance lagging that of our benchmark. When it comes to NVIDIA and other AI-centric companies, rapid growth is exciting, but it makes it difficult for us to judge what is normal. Our preference is to own established leading companies where we can make a more confident, evidence-based judgement about their growth and profitability.”
Overall, NVIDIA Corporation (NASDAQ:NVDA) ranks 3rd on Insider Monkey’s list titled Hedge Funds are Buying and Selling These 10 AI Stocks. While we acknowledge the NVIDIA Corporation (NASDAQ:NVDA), our conviction lies in the belief that 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: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These Stocks.
Disclosure: None. This article is originally published at Insider Monkey.
