Billionaires are selling Nvidia stock! I’d rather buy this AI share instead

With billionaire investors now banking profits in Nvidia stock, our writer considers an AI share that still looks to be on sale.

| More on:
Concept of two young professional men looking at a screen in a technological data centre

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Nvidia (NASDAQ: NVDA) stock has been nothing short of sensational over the last decade. It’s up an incredible 2,196% in just the past five years!

However, a few billionaire investors have been cutting their Nvidia positions in recent months. One high-profile example is Stan Druckenmiller, who slashed his holding in late March.

Between 1981 and 2010, Druckenmiller averaged a jaw-dropping 30.2% a year before taxes at his hedge fund (Duquesne Capital Management).

Anyone lucky enough to have invested $10,000 in the fund in 1981 would have seen that transformed into more than $26m by 2010!

This record easily makes him one of the world’s greatest investors. Today, he manages his own wealth and that of his family through Duquesne Family Office.

So, why has he been selling Nvidia stock?

Transformative potential recognised

Earlier this month, Druckenmiller told CNBC: “So, AI might be a little overhyped now, but underhyped long term. AI could rhyme with the Internet.”

What he’s saying here is that artificial intelligence (AI), which Nvidia’s chips are now synonymous with, might follow a similar trajectory to the internet.

That is, AI may be overhyped right now, but its long-term potential could be underappreciated. Like the internet, it might profoundly reshape society and the economy in ways that we don’t fully anticipate yet.

So, Druckenmiller is still bullish on AI long term. But he said that after going from $150 (about where he invested in the stock) to $900, the market has now caught up and priced in rosy expectations for Nvidia.

I agree with this. As interested as I am in technological innovation, with my portfolio heavily tilted towards this theme, I wouldn’t invest in Nvidia right now.

The stock is trading for 36 times sales and 75 times earnings. In my experience, investing at those multiples isn’t likely to lead to superior long-term returns.

A cheaper stock for the AI arms race

However, there is an AI-related stock that I have been buying. That is Taiwan Semiconductor Manufacturing Company (NYSE: TSM), the world’s largest chip foundry.

TSMC manufactures semiconductors for many of the top tech firms, including Apple, Advanced Micro Devices, Tesla, and Nvidia. So AI-fueled demand should boost the firm’s growth going forward.

Indeed, management expects advanced AI chip revenue to grow at a 50% annual rate over the coming years. In 2024, this part of the business is forecast to reach a low-teens percentage of overall sales.

While TSMC sees revenue growing more than 20% this year, it can still suffer from cyclicality. For example, it is currently seeing weakness in demand for smartphone and vehicle chips. So that’s worth bearing in mind.

However, the great thing here is that the stock is trading at 27 times earnings, dropping to just 20.5 on a forward-looking basis for 2024. That’s cheap.

For me, TSMC is an investment in the overall growth of AI itself. And this might be a smarter way to invest at this point rather than trying to pick individual winners.

It’s also a way to gain exposure to this century’s biggest mega-trends. Beyond AI, these include 5G networks and the internet of things (IoT), self-driving cars, and cloud computing.

They all need plenty of cutting-edge chips, which could see TSMC’s revenue growing for years to come.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has positions in Taiwan Semiconductor Manufacturing and Tesla. The Motley Fool UK has recommended Advanced Micro Devices, Apple, Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Close-up of British bank notes
Investing Articles

£8 per year in extra income for life, for each £100 invested today? Here’s how!

Christopher Ruane explains how he would aim to set up extra income streams for the rest of his life by…

Read more »

Photo of a man going through financial problems
Investing Articles

With a £20K Stocks and Shares ISA, I’d target £1,964 in annual dividends like this

With an annual passive income target close to £2,000, our writer explains how he'd put a £20K Stocks and Shares…

Read more »

Illustration of flames over a black background
Investing Articles

Down 63% in 2024, what’s going on with the Avacta (AVCT) share price?

2024 has been a difficult year for many companies in the biotechnology sector, with the AVCT share price down heavily.…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Here’s how I’d invest £800 the Warren Buffett way!

Christopher Ruane learns some lessons from super-investor Warren Buffett he hopes could improve his own stock market performance.

Read more »

British Isles on nautical map
Investing Articles

Michael Burry just bought 175,000 shares in this FTSE 100 company

Scion Asset Management announced a $6.5bn stake in BP this week. But what could Michael Burry be seeing in an…

Read more »

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

£5,000 in savings? Here’s how I’d aim to start making powerful passive income today

With a cash lump sum to invest, this Fool lays out how he'd start making passive income. He also details…

Read more »

Investing Articles

Just released: our 3 top small-cap stocks to consider buying before June [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

My best FTSE 250 stock to consider buying now for passive income while it’s near 168p

This is a rare stock with a growing underlying business and a fat dividend yield – it’s worth consideration for…

Read more »