Forget Nvidia: Billionaire investors are selling it and buying this $2 trillion stock instead

Investors are rarely at a loss for major data releases on Wall Street. Monthly economic reports highlighting jobs data and the headline inflation rate, along with about six weeks of full earnings reports from thousands of publicly traded companies, have the potential to overwhelm investors and allow key announcements to slip under the radar. radar.

In mid-August, one of these important announcements may have gone unnoticed.

On August 14, institutional investors with at least $100 million in assets under management filed Form 13F with the Securities and Exchange Commission. A 13F provides a concise, under-the-hood look at what Wall Street’s smartest money managers bought and sold over the last quarter (in this case, the quarter ending in June). In other words, the 13F tells investors which stocks, industries, sectors and trends have piqued the interest of Wall Street’s top asset managers.

Image source: Getty Images.

The second quarter was a particularly active time for billionaire money managers. Although artificial intelligence (AI) has made waves on Wall Street, billionaire investors have been clear sellers of dear AI Nvidia (NVDA -1.02%)and big buyers of two other trillion-dollar stocks.

Billionaire money managers gave Nvidia a boost for the third quarter in a row

Selling off Nvidia stock is nothing new for Wall Street’s brightest and richest investors. Last quarter marked the third quarter in a row in which more than a half-dozen prominent billionaire investors cut their stakes in Wall Street AI stocks. The seven billionaire sellers in the second quarter include (total shares sold in parentheses):

• Ken Griffin of Citadel Advisors (9,282,018 shares)
• David Tepper of Appaloosa (3,730,000 shares)
• Stanley Druckenmiller of the Duquesne Family Office (1,545,370 shares)
• Cliff Asness of AQR Capital Management (1,360,215 shares)
• Israeli Englander of Millennium Management (676,242 shares)
• Steven Cohen of Point72 Asset Management (409,042 shares)
• Philippe Laffont of Coatue Management (96,963 shares)

With Nvidia shares soaring 715% since the start of 2023 as of the closing bell on September 13, 2024, profit-taking is certainly a viable reason for billionaires to reduce their stakes in the AI ​​mainstay. But there can be a lot more to this rush selling activity than simply taking a profit.

For example, history has been extremely unkind to big future innovations and technologies over the past three decades. Although large addressable markets tend to excite investors, no game-changing innovation has escaped an incipient bubble in 30 years.

Investors tend to overestimate the adoption and/or utility of future technologies and innovations, ultimately resulting in real-world growth forecasts falling short of otherworldly expectations. The simple fact that most companies do not have a genuine game plan to generate a positive return on their AI investments is a pretty clear warning that an AI bubble is likely forming.

External and internal competition will also be a challenge for Nvidia. In addition to rival chipmakers bringing AI graphics processing units (GPUs) to market, all four of Nvidia’s top customers by net sales are developing their own AI GPUs. This should cause Nvidia hardware to lose valuable data center “real estate” in the future.

Last but not least, the insiders were big sellers. The last time an executive or board member bought their company’s stock on the open market was December 2020.

But while billionaire investors dumped shares of Nvidia in the second quarter, they were busy buyers of two more trillion-dollar shares.

Image source: Amazon.

Amazon

The first trillion-dollar company and “Magnificent Seven” member that billionaires looked to instead of Nvidia in the quarter ended in June is the e-commerce goliath Amazon (AMZN 1.08%). The five billionaire asset managers who have bought Amazon stock include (total shares bought in parentheses):

• Ole Andreas Halvorsen of Viking Global Investors (2,391,262 shares)
• Ray Dalio of Bridgewater Associates (1,597,676 shares)
• Ken Fisher of Fisher Asset Management (1,214,055 shares)
• Ken Griffin of Citadel Advisors (1,114,948 shares)
• Philippe Laffont of Coatue Management (702,235 shares)

Although Amazon’s consumer-facing online marketplace is how most people become familiar with the company, online retail sales account for very little of Amazon’s operating cash flow and net income. Currently, most of its operating income can be traced to its world-leading cloud infrastructure services platform, Amazon Web Services (AWS).

Sales growth for AWS reaccelerated in the second quarter to 19% year-over-year, but remained flat in the double digits. Given that enterprises are still very early in their cloud spending cycle and AWS controls about 33% of the global cloud infrastructure services market, according to Canalys, this operating segment should remain Amazon’s cash cow going forward.

Amazon also generates plenty of cash flow and double-digit sales growth from its two other ancillary operating segments: advertising services and subscription services. The former benefits from the exceptional ad pricing power that comes with attracting 3 billion visits each month.

Meanwhile, subscription services (e.g. Prime) should thrive on an expanded content library. Amazon has become the exclusive home of Thursday night football and recently signed an 11-year streaming rights deal with the National Basketball Association (NBA). When coupled with the value that Prime offers to its consumers in the online marketplace (for example, free two-day shipping on most items), it’s easy to see that Amazon has significant pricing power with Prime.

Based on traditional fundamentals like the price-to-earnings (P/E) ratio, Amazon is far from cheap. But relative to consensus cash flow estimates for 2025 — cash flow is a better measure of value for Amazon as it aggressively reinvests back into its business — Amazon is valued well below the cash flow multiples it used to traded throughout the 2010s.

Microsoft

The other trillion-dollar stock that Form 13F shows billionaire investors favored over Nvidia is a software colossus Microsoft (MSFT 0.88%). A total of eight billionaire fund managers purchased Microsoft shares in the second quarter, including (total shares purchased in parentheses):

• Ken Fisher of Fisher Asset Management (1,340,392 shares)
• Ole Andreas Halvorsen of Viking Global Investors (695,444 shares)
• Ray Dalio of Bridgewater Associates (510,822 shares)
• Israeli Englander of Millennium Management (240,624 shares)
• John Overdeck and David Siegel of Two Sigma Investments (177,726 shares)
• Stephen Mandel of Lone Pine Capital (90,287 shares)
• Philippe Laffont of Coatue Management (20,684 shares)

The main buzz around Wall Street’s second-largest publicly traded company by market capitalization is its ties to artificial intelligence. Microsoft is a major investor in OpenAI, the company behind the popular chatbot ChatGPT, and has worked with OpenAI to incorporate AI solutions into its Bing search engine and Edge web browser.

Additionally, Azure is the world’s #2 cloud infrastructure services platform. Microsoft is actively incorporating generative AI solutions and large language model capabilities into Azure to accelerate growth and make its platform more useful to enterprise customers. AI is very much at the heart of Microsoft’s long-tail growth strategy.

But as we alluded to earlier, there are signs of an early innings AI bubble forming. The good news for Microsoft is that it has its legacy segments to lean on.

While Windows and Office are no longer the growth stories they were 20 years ago, Windows remains the dominant operating system on computers around the world. In other words, Microsoft can rely on predictable operating cash flow from these legacy segments in almost any economic climate.

Besides, Microsoft is sitting on a mountain of cash. Even after acquiring gaming company Activision Blizzard for $68.7 billion last year, it ended June with $75.5 billion in cash, cash equivalents and short-term investments. In fact, Microsoft generated over $118 billion in operating cash flow over the past 12 months. This money gives Microsoft the ability to make acquisitions to rapidly expand its ecosystem of products and services.