Stanley Druckenmiller wowed investors year after year with his winning streak at the helm of Duquesne Capital Management. There, he scored an average annual return of 30% over 30 years -- and didn't post a single year of money losses. This top investor closed the fund in 2010 but has since continued investing through the Duquesne Family Office -- and one of his favored stocks in recent times has been artificial intelligence (AI) giant Nvidia(NASDAQ: NVDA).
Druckenmiller bought shares of the AI chip leader in the fourth quarter of 2022, as the AI boom picked up momentum. Since that time, through the beginning of this year, they gained 400%. Earlier this year, this star investor started cutting his Nvidia holding, and in the third quarter, he sold all of his Nvidia shares.
At the same time, Druckenmiller opened a $41 million position in a rapidly growing AI player that, like Nvidia, also split its stock this year after enormous gains. This represents the investor's second-biggest new position by value in the quarter. Let's find out more about this famous investor's latest moves and consider whether you should follow.
Image source: Getty Images.
The reason Druckenmiller sold Nvidia
First, let's consider Druckenmiller's sale of Nvidia. Does this mean he's lost faith in the AI leader?
Not at all. According to comments made in press interviews, Druckenmiller believed valuation had reached a high point -- and it was time to lock in profits. Meanwhile, Nvidia continued to advance and now is heading for an increase of more than 180% this year. In a Bloomberg interview last month, Druckenmiller even said closing the Nvidia position was a mistake, and if the price were to decline, he would consider scooping up Nvidia shares again.
Though Druckenmiller viewed Nvidia shares as a bit pricey, he continues to believe in the Nvidia story and potential for more growth ahead. If Nvidia's valuation dips at some point moving forward, it's very possible the stock will once again find itself in Druckenmiller's portfolio.
Let's move on to Druckenmiller's recent AI addition. This company saw its shares soar more than 400% over five years, surpassing $1,000 and, like Nvidia, it announced a 10-for-1 stock split this year to make the stock more accessible for a broad range of investors. A split doesn't change anything fundamental about a company, but through the issuance of more shares to current holders, it lowers the per-share price.
Druckenmiller bought shares of this networking giant
This stock that caught Druckenmiller's eye is Broadcom (NASDAQ: AVGO). The company is a giant in the area of networking, selling thousands of products used in areas from data center networking to home connectivity and factory automation. Now is a great time to get in on Broadcom as it's heading for a new era of growth, thanks to its AI business and the acquisition of cloud computing and virtualization company VMware.
In recent quarters, demand from major cloud service providers has driven growth in Broadcom's AI networking and custom accelerators. In the latest quarter, custom AI accelerators' growth more than tripled and Ethernet switching quadrupled. Considering the pace of growth in AI, with today's $200 billion market expected to reach $1 trillion by the end of the decade, there's reason to be optimistic about these trends continuing.
As for VMware, Broadcom says it's on track in the next fiscal year to reach or surpass its goal for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $8.5 billion within three years of the acquisition. In the latest quarter, Broadcom reported a 47% increase in revenue to $13 billion, thanks to AI demand and VMware, and the company predicts a 51% increase in revenue for the next quarter.
Valuations of Broadcom and Nvidia
Now let's talk valuation. Broadcom trades at about half the level of Nvidia right now in relation to forward earnings estimates, making it a great time to get in on this company. Like Nvidia, Broadcom is set to benefit from the AI boom over the long term.
NVDA price-to-earnings ratio (P/E) (Forward) data by YCharts.
Let's get back to our question: Should you follow Stanley Druckenmiller's third-quarter moves? Before making a decision, it's important to consider the top investor's reason for buying or selling -- and your own investment strategy.
Druckenmiller sold all of his Nvidia shares this year as valuation climbed and he locked in gains, but he's expressed regret about the move and remains optimistic about the company's future. If you're a long-term investor, you may want to hold onto your Nvidia stock -- or even open a position in Nvidia.
As for Broadcom, you might want to follow Druckenmiller's lead. This AI company has climbed in the double digits this year, but its valuation remains very reasonable and demand for the company's products remains high. That means there may be plenty of room for the stock to run over time.
Should you invest $1,000 in Broadcom right now?
Before you buy stock in Broadcom, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Broadcom wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $870,068!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of November 18, 2024
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
