Artificial intelligence (AI) has been the biggest investing theme on the planet in recent times. Investors have piled into AI stocks -- from those creating the technology to those using it -- amid hopes AI will revolutionize both business and your daily life.
Today's $200 billion AI market is forecast to reach $1 trillion by the end of the decade, suggesting major opportunities ahead for companies at the forefront. And these AI stocks have driven gains in the S&P 500, helping the index confirm its presence in a bull market earlier this year.
Billionaire investors have led this movement, heavily investing in top AI players, as well as promising up-and-coming ones -- and the rest of the investment community has watched their moves, often for clues about what may happen next. These top investors, scoring many wins over time, have proven their abilities to detect trends and choose the most promising investment opportunities.
This brings me to one particular happening in the third quarter. Billionaire investors have been selling shares of two of this year's best-performing AI stocks: Nvidia(NASDAQ: NVDA) and Palantir Technologies(NYSE: PLTR). Stanley Druckenmiller of the Duquesne Family Office, Israel Englander of Millennium Management, and Jeff Yass of Susquehanna International have sold shares of both.
Is this movement away from two of the biggest AI players a warning for investors?
Image source: Getty Images.
Nvidia and Palantir
First, here's a bit of background on these two AI players. Nvidia is the leader in the global AI chip market, holding more than 80% share, and offers a wide range of other related products and services to customers. This has helped the company report triple-digit revenue gains quarter after quarter and maintain margins wider than 70% in recent times -- showing the chip giant is highly profitable on sales.
Nvidia's stock performance has reflected this success, surging more than 180% so far this year and climbing 2,500% over five years.
Palantir incorporates AI into its software-as-a-service platform that helps customers aggregate all of their data. It then uses this data to make crucial decisions, develop new products or services, or better manage workflow.
Palantir's Artificial Intelligence Platform (AIP) has seen enormous demand and helped the 20-year-old company recently report its highest profit ever. Like Nvidia, Palantir stock has followed this great performance, advancing 250% this year and more than 500% over five years.
It's no surprise, then, that investors -- including billionaires -- flocked to these stocks as the AI boom accelerated. But as mentioned above, several billionaires reduced or even closed positions in these AI leaders in the third quarter. Here are a few examples:
- Stanley Druckenmiller of the Duquesne Family Office closed out his position in Nvidia after buying the stock in the fourth quarter of 2022. He reduced his position in Palantir by 94% after buying the stock in the first quarter of this year.
- Israel Englander of Millennium Management reduced his position in Nvidia by 13% after buying the stock in the third quarter of 2008. He cut his position in Palantir by 90% after buying the stock in the third quarter of 2020.
- Jeff Yass of Susquehanna International cut Nvidia by 29% after buying the stock in the third quarter of 2008. He reduced his Palantir position by 28% after buying the shares in the fourth quarter of 2020.
Have AI stocks reached a top?
Let's get back to the question: Is this move to sell two major AI stocks a signal that AI stocks may have reached a top? This would represent a warning to investors who have been adding AI shares to their portfolios hand over fist.
But I don't think that's what's happening here. It's true that certain players, such as this year's biggest gainers, have seen valuations soar in relation to forward earnings estimates.
NVDA Price-to-Earnings Ratio (PE) (Forward) data by YCharts.
This could make some investors think twice before buying -- and limit these particular stocks' gains in the near term. So it's logical that investors who have scored big wins from such stocks may consider reducing or even closing their positions.
These moves aren't always permanent, though. Druckenmiller said during a Bloomberg interview that he thought Nvidia had become a bit pricey but would consider buying the stock again if the price were to decrease.
Buying Broadcom stock
It's also logical to see these investors taking winnings from these positions and allocating them to other AI stocks that may not have climbed as much yet -- but have the potential to advance as the AI boom continues. Druckenmiller and Englander both bought shares of Broadcom(NASDAQ: AVGO) in the recent quarter, an AI player that's climbed about 50% this year and, trading at 26x forward earnings estimates, still has plenty of room to run.
Finally, it's important to remember that the AI story is in its early chapters. As mentioned earlier, it's on track to become a trillion-dollar market in a few years.
A rotation out of some of this year's top performing AI players isn't a bad sign -- for those particular stocks over time or the market, in general. That means there's still plenty of opportunity to invest in AI stocks -- and even some stocks billionaires have been selling still could make a smart addition to your portfolio if you hold on for the long term.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
