Nvidia(NASDAQ: NVDA) has led the artificial intelligence (AI) boom that started with the launch of ChatGPT in November 2022. The stock price has risen 895% since then and Wall Street is still very bullish. Currently, 92% of the 62 analysts covering Nvidia rate the stock as a Buy, and the average price target of $175 per share implies an upside of 30% from the current stock price of $134.
However, billionaire Stanley Druckenmiller – a former hedge fund manager known for delivering 30% annual returns over 30 years – sold his entire stake in Nvidia in the third quarter. At the same time he started a new position Broadcom(NASDAQ:AVGO)another chipmaker that recently executed a 10-to-1 stock split after a huge share price rise.
Interestingly, just a year ago, Druckenmiller had 14% of his portfolio in Nvidia, making it the largest holding at the time. Today, Druckenmiller no longer has any exposure to Nvidia, but Broadcom is among his top 15 holdings. Does he know something that Wall Street doesn’t?
Nvidia is best known for its graphics processing units (GPUs), chips that perform technical calculations faster and more efficiently than central processing units (CPUs). This allows GPUs to accelerate complex workloads such as training machine learning models and running artificial intelligence applications. Nvidia GPUs are the gold standard, with a market share in AI accelerators exceeding 80%.
What really sets Nvidia apart, however, is its vertical integration that includes both hardware and software. The company links its GPUs to CPUs and networking equipment. CEO Jensen Huang says the full-stack approach allows Nvidia to build data center systems with superior total cost of ownership. Additionally, Nvidia offers the most robust collection of software development tools for accelerated computing on its CUDA platform.
The company launched CUDA nearly two decades ago and now includes hundreds of code libraries and pre-trained models that streamline application development across a range of disciplines, from robotics to drug discovery. While numerous chipmakers want to dethrone Nvidia as the leader in AI accelerators, this would not only require better chips but also overcome nearly two decades of software expertise.
Nvidia reported strong financial results for the third quarter of fiscal 2025, ending October 2024. Revenue rose 94% to $35 billion, driven by 112% growth in data center sales and 72% growth in sales of cars and robotics. Meanwhile, non-GAAP earnings more than doubled to $0.81 per diluted share.
Looking ahead, Wall Street expects Nvidia’s adjusted profits to rise 50% over the next four quarters. That makes the current valuation of 52 times adjusted earnings look pretty cheap.
This begs the questions: why did Stanley Druckenmiller sell his entire position? Does he know something that Wall Street doesn’t?
The answer is no. Druckenmiller told Bloomberg in July that he had made “a big mistake” by selling Nvidia.
Broadcom sells semiconductors and infrastructure software. The chips are used in Ethernet switches and routers, data center storage and mobile devices. The company has been a supplier of combined Wi-Fi and Bluetooth chips for some time Apple iPhones. Meanwhile, its software solutions include cybersecurity, mainframe observability, and virtualization.
In addition to wireless chips, Broadcom has established a strong position in two other semiconductor categories. The company has an 80% market share in networking chips and 60% in custom AI chips. Spending in both markets is expected to grow 20% to 30% annually in the coming years as companies modernize their data center infrastructure.
Broadcom reported reasonable financial results in the fourth quarter of fiscal 2024, which ended in November 2024. Revenue rose 51% to $14 billion, and non-GAAP earnings rose 28% to $1.42 per diluted share. That said, the acquisition of virtualization specialist VMware added 40 percentage points to revenue growth, meaning organic revenue rose just 11%.
However, management made two shocking statements on the earnings call. First, the sale of AI chips to its three unnamed hyperscale customers – analysts guess Alphabet‘s Google, Metaplatformsand TikTok parent ByteDance – will grow at least fivefold over the next three years. Second, Broadcom believes it will soon add two more major customers – reportedly Apple and OpenAI – which will set the stage for massive growth in AI sales.
Looking ahead, Wall Street expects Broadcom’s adjusted earnings to grow 30% over the next four quarters. According to the consensus estimate, the current valuation of 46 times adjusted earnings seems reasonable, but not as attractive as Nvidia’s price tag. Investors should consider buying a small position in both stocks today.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Trevor Jennevine has positions at Nvidia. The Motley Fool holds positions in and recommends Alphabet, Apple, Meta Platforms and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Billionaire Stanley Druckenmiller sells Nvidia stock and buys another Stock-Split AI share. Does he know something that Wall Street doesn’t? was originally published by The Motley Fool
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