Hedge fund managers with proven track records were buying Broadcom stock in the second quarter.
Artificial intelligence (AI) aficionado Nvidia (NVDA 1.40%) has generated incredible returns for shareholders of late, so much so that the chipmaker completed a 10-for-1 stock split in June to reset its soaring share price.
Even so, the hedge fund managers listed below trimmed their positions in Nvidia during the second quarter while reinvesting profits in Broadcom (AVGO -0.25%), another semiconductor company that recently completed a 10-for-1 stock split.
- Israel Englander of Millennium Management sold 676,242 shares of Nvidia, reducing his stake by 5%. He also increased his stake in Broadcom by 55%, making it his eighth-largest position, excluding options.
- Ken Griffin of Citadel Advisors sold 9.2 million shares of Nvidia, reducing his stake by 79%. Meanwhile, he increased his stake in Broadcom by 64%, and it now ranks as his 10th-largest position, excluding options.
- David Shaw of D.E. Shaw & Co. sold 12.1 million shares of Nvidia, reducing his stake by 52%. Meanwhile, he increased his stake in Broadcom by 229%, and it’s now his seventh-largest position.
Those three money managers run the best-performing hedge funds as measured by net gains since inception, so trades made by Englander, Griffin, and Shaw are noteworthy. Here’s what investors should know about Nvidia and Broadcom.
Nvidia: The stock-split AI stock billionaires were selling
Nvidia graphics processing units (GPUs) are the gold standard in accelerated computing, a discipline that pairs specialized hardware and software to speed up complex workloads, like 3D graphics and AI applications. Nvidia holds more than 95% market share in workstation graphics processors and more than 90% market share in data center GPUs. More importantly, the company currently accounts for more than 80% of AI chip sales.
Nvidia’s success is due in large part to its robust software ecosystem. Its CUDA platform includes hundreds of software libraries (building blocks) that streamline model training and application development across a range of disciplines, such as scientific computing, data science, and machine learning. The CUDA ecosystem has been in development for almost two decades, which has made Nvidia GPUs the go-to option for developers of accelerated computing applications, especially where AI is concerned.
Angelo Zino at CFRA believes Nvidia “will be the most important company to our civilization over the next decade.” That brings me to an important point. Despite cutting their positions in Nvidia during the second quarter, two of the hedge fund managers mentioned earlier still have substantial exposure to the stock. Excluding options, Nvidia is the fifth-largest position in Israel Englander’s portfolio and the third-largest in David Shaw’s portfolio.
Nvidia shares could be volatile in the near term because it reports earnings on Aug. 28 and because Blackwell GPU shipments have reportedly been delayed for three months. Those chips, which offer much faster AI training and inference compared to the previous Hopper architecture, were supposed to ship later this year. Management will likely discuss the situation on the earnings call, and the stock could move sharply depending on the context.
That said, Blackwell GPUs will ship eventually, and Nvidia is ideally positioned to benefit as businesses spend more money on AI. Wall Street expects earnings to grow at 37% annually over the next three years. That makes its current valuation of 73 times earnings look relatively reasonable. Those figures have a price/earnings-to-growth ratio (PEG) of 2, which is well below the three-year average of 3.1.
Investors interested in owning Nvidia stock should start with a small position today. If the stock declines when the company reports earnings later this month, consider buying a few more shares.
Broadcom: The stock-split AI stock billionaires were buying
Broadcom breaks its business into semiconductor solutions and infrastructure software. The company has a strong presence in both spaces. Within semiconductor solutions, Broadcom is the market leader in networking chips and application-specific integrated circuits (ASICs), custom chips for specialized use cases like AI.
Within infrastructure software, Broadcom subsidiary VMware is the market leader in server virtualization software and hyperconverged infrastructure, a term that refers to software-defined platforms that combine virtualized compute, storage, and networking to help businesses utilize physical infrastructure more efficiently. Forrester Research has also recognized the company as a leader in cloud cost management software.
Leadership in networking chips should help Broadcom monetize AI, but its leadership in ASICs could be a particularly big source of momentum. Currently, ASICs represent less than 10% of AI chips, but Morgan Stanley thinks that figure could reach 30% in five years. That forecast implies ASICs will take share from GPUs in AI computing. Goldman Sachs analysts recently wrote, “Alongside Nvidia, we view Broadcom as a critical piece to the ongoing AI infrastructure build-out.”
Looking ahead, Wall Street expects Broadcom to grow non-GAAP (generally accepted accounting principles) earnings per share at 21% annually through 2026. That consensus estimate makes the current valuation of 37.8 times non-GAAP earnings look reasonable. Patient investors should consider purchasing a small position in this semiconductor stock today.
Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Goldman Sachs Group and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
