Earnings season is officially moving into high gear. In the span of about six weeks, a majority of America’s major publicly traded companies will inform Wall Street and investors about their operating performance in the previous quarter.
While corporate earnings growth is critical to the success of a historically expensive stock market, earnings season isn’t the only important metrics that investors should wisely keep an eye on.
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August 14 marked the filing deadline for institutional investors with at least $100 million in assets under management (AUM) to file Form 13F with the Securities and Exchange Commission. This filing gives investors a snapshot of what Wall Street’s smartest and most successful asset managers bought and sold in the last quarter (in this case, the second quarter).
Admittedly, 13Fs have a drawback: They are filed up to 45 calendar days after the end of a quarter, meaning they are likely to provide outdated information for active hedge funds. But despite this shortcoming, they can still provide valuable clues about which stocks, industries, sectors and trends Wall Street’s top money managers are intrigued by.
Apart from Berkshire HathawayWarren Buffett’s CEO extraordinaire, one of the most followed money managers among billionaires, is Susquehanna International Group co-founder and CEO Jeff Yass.
Susquehanna ended June with $537 billion in assets under management and thousands of holdings, including several put and call options. However, the actions that stand out most in the quarter ending in June, based on Susquehanna’s 13F, are what Yass and his team did in the area of artificial intelligence (AI).
No publicly traded company has been as responsible for taking Wall Street’s major stock indexes to new heights, or for fueling the AI revolution, as Nvidia (NASDAQ: NVDA). Since the end of 2022, Nvidia’s market cap has catapulted from $360 billion to $3.39 trillion, as of the closing bell on October 18.
Despite Nvidia’s graphics processing units (GPUs) being the undisputed top choice of companies overseeing generative AI solutions and training large language models, not all billionaire money managers are optimistic about its future.
During the second quarter, Yass’s fund jettisoned 52,497,275 shares of Nvidia, dropping its holdings by 73% from the quarter ending in March. Please note that Nvidia completed a historic 10-to-1 stock split after the close of trading on June 7, and the share count above has been adjusted for this split.
While profit-taking may be a viable and relatively benign explanation for this selling activity, there are also some glaring headwinds that could have forced Susquehanna’s aggressive selling of Nvidia stock in the quarter ending in June.
At the top of the list of potential sales catalysts is history. Since the advent of the Internet in the mid-1990s, we have witnessed a host of groundbreaking technologies and innovations. While many of these “next-big-thing” trends have produced dazzling, addressable markets, their only certainty was that a bubble would burst early on.
For thirty years, investors have repeatedly overestimated how quickly a new technology, innovation or trend would be adopted and used mainstream by consumers and/or businesses. When these high expectations are inevitably not met, the music stops and the bubble bursts. Because most companies don’t have a clear plan to monetize their AI investments and generate positive returns, it appears that investors have overestimated the usefulness of early-stage AI. If the AI bubble bursts, Nvidia would probably get beat up.
Regulators aren’t doing Nvidia any favors either. The US has restricted exports of the company’s powerful AI GPUs to China, one of Nvidia’s largest dollar markets.
Yass and his team may also be concerned about competitive pressures weighing on Nvidia’s pricing power and margins. In addition to third-party competitors bringing chips to market, Nvidia’s top four customers by net revenue are all developing AI GPUs for use in their data centers. With Nvidia’s AI GPUs lagging behind and substantially more expensive than these in-house chips, Wall Street’s AI darling could miss out on future orders.
But while Susquehanna’s brightest minds, including Yass, were busy dumping Nvidia stock, they absolutely pounced on another major company in the AI arena.
Image source: Getty Images.
Despite Yass’s fund adding more than 4,600 positions in the second quarter, Susquehanna’s significant addition to his existing stake in AI networking giant is the one that really stands out. Broadcom (NASDAQ:AVGO).
During the quarter ending in June, Yass oversaw the purchase of 2,347,500 shares of Broadcom, increasing Susquehanna’s stake by 73% to 5,582,590 shares. Broadcom also completed a 10-for-1 stock split, but did so in mid-July.
There’s no doubt that artificial intelligence is a key reason Broadcom is expected to achieve 44% revenue growth this year. Enterprises rely on the company’s networking solutions to connect tens of thousands of GPUs to maximize their computing capabilities and reduce tail latency. Broadcom’s solutions are critical to the split-second decision-making that powers AI-powered software and systems.
While Broadcom’s stock and operating performance would be susceptible to negative impacts if the AI bubble bursts, the big difference between Nvidia and Broadcom is their revenue channels. While an overwhelming majority of Nvidia’s revenue and recent growth is tied to its AI hardware, AI still represents a minority of Broadcom’s net revenue.
Broadcom’s main source of profit has long been its ties to the global smartphone industry. It offers a range of wireless chips and accessories used in next-generation smartphones. As wireless carriers expand 5G’s reach, Broadcom has benefited from a steady device replacement cycle.
In addition to being a notable player in smartphones, Broadcom also develops optical sensors used in industrial equipment and robotics, connectivity and LED solutions for next-generation cars, and cybersecurity solutions, to name just a few of its other revenue channels to mention.
Building on this point, the company’s management team has not been afraid to make the occasional acquisition to expand its footprint and strengthen cross-selling capabilities. Broadcom’s 2019 purchase of Symantec’s enterprise security business opened the door to high-margin cybersecurity services, while its $69 billion acquisition of cloud-based virtualization software provider VMware in November 2023 should strengthen the company’s private and hybrid cloud strategy.
A significantly more diverse product and service portfolio for Broadcom appears to be the appeal that has grabbed Susquehanna International co-founder Jeff Yass.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Berkshire Hathaway and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has one disclosure policy.
Billionaire Jeff Yass sold 73% of Susquehanna’s stake in Nvidia and is getting into the beloved artificial intelligence (AI) stock. was originally published by The Motley Fool
