Every quarter, hedge funds and portfolio management firms with more than $100 million invested in the market are required to file a form 13F with the Securities and Exchange Commission. Analyzing these filings can be a helpful tool when trying to identify trends among "smart money" investors.
One theme that I'm starting to notice is that some of Wall Street's highest profile billionaires are selling Nvidia (NVDA -0.02%) stock. D. E. Shaw, a hedge fund founded by computer scientist David Shaw, specializes in an investment strategy which leverages advanced mathematics and algorithms. This technique is often referred to as quantitative trading. Shaw's role at the fund is in more of a high-level capacity at this point as opposed to the day-to-day trading decisions.
Below, I've outlined why D.E. Shaw's recent sale of Nvidia and purchase of another chip stock, Broadcom (AVGO 0.29%), may look like a savvy move in the long run.
Is selling Nvidia stock right now a good idea?
Last quarter D. E. Shaw sold 12.1 million shares of Nvidia, reducing its position by about 51% in the process.
I'll concede that such a move may look puzzling to some. After all, Nvidia is the undisputed leader of AI-powered chipsets called graphics processing units (GPUs). And with its next generation Blackwell series GPUs hitting the market soon, Nvidia looks positioned for even further growth. For now.
I think hedge funds are looking past the high-level narrative that AI is the "next big thing" and are not blindly investing into the largest opportunities. Instead, more sophisticated investors are asking the question that no one really likes to think about: When will this growth slow down?
As unsettling as this may sound, Nvidia's best days may be in the rearview mirror. Why is that?
Well, the competitive landscape among GPU makers is beginning to intensify. Outside of Advanced Micro Devices and Intel, Nvidia faces rising competition from Meta Platforms, Microsoft, Amazon, and potentially even Tesla.
Although increasing competition could be seen as a catalyst that spurs new growth opportunities, there's another important detail to note about the competitors cited above. Many of these companies are Nvidia's customers -- and potentially very large customers at that.
As other companies begin using more of their own chips, it's likely that Nvidia's pricing power will diminish. In turn, the company's revenue growth will slow down, causing margins to narrow and profitability to shrink.
In summary, I do not think exponential gains are on the horizon for Nvidia stock anytime soon. For these reasons, I think D. E. Shaw's decision to trim its position in Nvidia is a wise choice.
Image source: Getty Images.
Why Broadcom looks like a great investment right now
You may be wondering why D. E. Shaw swapped Nvidia for Broadcom when there are a host of other opportunities out there. I think Broadcom looks particularly attractive because it is a less obvious choice among chip stocks in particular.
There are a couple of reasons for this which I've outlined below:
1. Extremely diversified business: One reason I view Broadcom as a subtle yet lucrative opportunity surrounds the company's acquisition of VMware last November. Adding VMware underneath its umbrella helps Broadcom diversify its infrastructure solutions with additional software services.
2. Its position in the chip landscape is unique: During the past couple of years, demand for GPUs has soared as companies rush to develop generative AI applications that require enormous processing power. Although Nvidia, AMD, and Intel offer GPUs that are used in a multitude of AI applications, Broadcom focuses more on infrastructure connectivity inside of data centers.
Demand for IT hardware used inside of data centers has experienced less parabolic growth in comparison to the GPU market. With that said, I think the high levels of spending on sophisticated computing products will naturally segue into more infrastructure-adjacent solutions.
Given this outlook, I see Broadcom's growth story at a much different and earlier stage than some of its tangential cohorts such as Nvidia.
Is Broadcom a good stock to buy right now?
At the time of this writing, Broadcom's forward price-to-earnings (P/E) multiple of about 28 pales in comparison to that of Nvidia, which hovers around 41.
From a macro standpoint, the disparity between valuation multiples could suggest that the market has yet to place much of a premium on the infrastructure solutions component of the overall AI narrative.
However, comparing Broadcom to Nvidia isn't exactly the best comparable analysis when it comes to the underlying specifics of each company's business. As illustrated below, investors can see that Broadcom's forward P/E fits squarely in the middle of more direct competitors such as Arista Networks and Cisco.
ANET PE Ratio (Forward) data by YCharts
I think the unique combination of an IT infrastructure solutions business complemented with VMware's software suite will bring a new wave of growth for Broadcom as companies increasingly invest in AI and digital solutions.
With more accelerated long-term growth looking likely, I think D. E. Shaw's decision to trim Nvidia and add to Broadcom looks like a savvy idea at the moment. Investors who are looking for exposure to multiple pockets of the AI realm may want to scoop up shares in Broadcom right now as the stock still trades at reasonable valuation levels.
