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By Sean Williams, The Motley Fool
At the moment, there's seemingly no hotter trend than artificial intelligence (AI). Utilizing software and systems in place of humans, and allowing these systems to evolve over time without human intervention in order to become more proficient at their tasks, gives AI a broad use-case that covers almost every sector and industry.
But what's arguably been an even more-trusted group of stocks for Wall Street and investors is companies enacting stock splits.
A “stock split” is an event that allows a publicly traded company to cosmetically alter its share price and outstanding share count by the same magnitude. I say “cosmetically,” because stock splits don't alter a company's market cap or operating performance.
Most investors tend to focus on forward-stock splits, which are designed to reduce the nominal share price of a publicly traded company to make it more affordable for those without access to fractional-share purchases with their broker. Since the midpoint of 2021, nearly a dozen high-profile businesses have conducted a forward-stock split, including AI kingpin Nvidia (NVDA).
However, Wall Street's brightest minds aren't necessarily enamored with the “infrastructure backbone” of the artificial intelligence revolution. During the December-ended quarter, billionaires were active sellers of Nvidia stock and piled into two recent stock-split stocks instead.
Billionaire investors sent artificial intelligence stock Nvidia to the chopping block
Shares of Nvidia have catapulted higher by nearly 470% since the start of 2023. The clear-cut catalyst behind its outperformance is its A100 and H100 graphics processing units (GPUs), which are what power AI-accelerated data centers. In particular, Nvidia's H100 GPU is responsible for training large language models and powering generative AI solutions.
With its chips in high demand, Nvidia has enjoyed jaw-dropping GPU pricing power. Data Center segment sales jumped by 217% in fiscal 2024 (ended January 28), while cost of revenue across all of its segments rose by a far more modest 43%.
Despite these advantages, eight billionaire investors reduced their respective fund's stakes in Nvidia during the fourth quarter, including (total shares sold in parenthesis):
- Israel Englander of Millennium Management (1,689,322 shares)
- Jeff Yass of Susquehanna International (1,170,611 shares)
- Steven Cohen of Point72 Asset Management (1,088,821 shares)
- David Tepper of Appaloosa Management (235,000 shares)
- Philippe Laffont of Coatue Management (218,839 shares)
- Chase Coleman of Tiger Global Management (142,900 shares)
- John Overdeck and David Siegel of Two Sigma Investments (30,663 shares)
The scarcity of Nvidia's GPUs is the primary reason its Data Center sales more than tripled last year. With the company increasing its production of H100 GPUs, and new companies entering the playing field, GPU scarcity is going to be less of a talking point by the latter-half of this year. Billionaires sending Nvidia to the chopping block may be rightly anticipating a drop-off in the company's pricing power and gross margin.
In addition to an increase in external competition, Nvidia could face immense challenges from internal competitors. Four “Magnificent Seven” components account for roughly 40% of Nvidia's net sales. Unfortunately, all four of these industry leaders are developing in-house GPUs of their own. There's a real possibility Nvidia's orders from its top customers taper off significantly in the coming years.
History might be the other big catalyst that created a billionaire exodus from Nvidia in the December-ended quarter. There hasn't been a next-big-thing investment or innovation in three decades that didn't endure an early stage bubble. Investors commonly overestimate the adoption and uptake of new technology, and artificial intelligence is unlikely to break that trend.
But while these eight billionaires were busy dumping shares of Nvidia, quite a few were piling into two outperforming stock-split stocks.
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Walmart
The first stock-split that was a favorite among billionaire investors during the fourth quarter is retail juggernaut Walmart (WMT). Walmart effected a 3-for-1 forward split in late February.
All told, five of the prominent billionaires who sold Nvidia stock were buyers of Walmart shares, including (total shares purchased in parenthesis):
- Israel Englander of Millennium Management (1,416,174 shares)
- John Overdeck and David Siegel of Two Sigma Investments (540,004 shares)
- Jeff Yass of Susquehanna International (261,294 shares)
- Steven Cohen of Point72 Asset Management (150,570 shares)
From an investment standpoint, the lure of putting your money to work in Walmart has long been its size. It's a company with deep pockets that's able to purchase products in bulk. A lower per-unit price for most of its goods allows Walmart to undercut traditional grocers and local mom-and-pop shops on price.
To add to the above, the vastness of the products Walmart carries in its stores is rivaled by only a few competitors. Walmart has evolved into a one-stop shopping experience for consumers looking for a good deal. With the prevailing rate of inflation creeping back up, Walmart is just the type of business we'd expect to benefit.
Another reason investors tend to put their trust in Walmart stock over the long run is because it's a consumer staples company. It carries basic need goods and services that are going to draw consumers into its stores regardless of how well or poorly the U.S. economy and stock market are performing. This leads to predictable operating cash flow year after year — and Wall Street loves predictability.
Although Walmart stock isn't cheap, its competitive advantages can yield solid gains for investors over the long run.
Chipotle Mexican Grill
The other stock-split stock that billionaires were buying as Nvidia shares were being jettisoned is fast-casual restaurant chain Chipotle Mexican Grill (CMG 0.19%). Chipotle announced plans to enact a 50-for-1 forward split in June, assuming it gains approval from its shareholders.
During the December-ended quarter, three notable billionaire investors were buyers of Chipotle stock, including (total shares purchased in parenthesis):
- John Overdeck and David Siegel of Two Sigma Investments (32,250 shares)
- Jeff Yass of Susquehanna International (15,900 shares)
Like Walmart, Chipotle offers investors a couple of well-defined competitive edges that have led to its long-term outperformance.
For starters, the company's food has been a differentiator. When possible, the company sources its vegetables locally, and it uses responsibly raised meats that are free of routine-use antibiotics. Chipotle's management team learned a long time ago that consumers will willingly pay more for higher-quality food that doesn't wind up in a freezer.
“Chipotlanes” are another big source of growth for the company. A “Chipotlane' is a dedicated drive-thru lane for mobile orders. Outfitting most of its new stores with these digital drive-thru lanes is helping to expedite orders and sustain a superior growth rate among fast-casual restaurant chains.
Perhaps Chipotle's biggest advantage is the most subtle of them all: its menu. The company has purposely kept its menu relatively small to ensure that its staff can quickly prepare meals and shorten wait times. A limited menu also makes it easier for Chipotle to create meaningful buzz when introducing new items.
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