The most important data release of the quarter came earlier this week – and I’m not talking about the much-anticipated inflation report for July.

No later than 45 calendar days after the end of the quarter, institutional investors with at least $100 million in assets under management must file Form 13F with the U.S. Securities and Exchange Commission. A 13F provides a glimpse into the stocks that the smartest, most successful and wealthiest Wall Street investors have bought and sold.

Despite the limitations of 13F forms—they can be 45 days old when filed, for example, meaning the data displayed may be out of date for active fund managers—they provide valuable insight into which stocks, industries, sectors and trends are attracting the interest of Wall Street’s top money managers.

Image source: Getty Images.

While there has been a lot of buying and selling activity among companies involved in today’s hottest investment opportunity, artificial intelligence (AI), the latest round of 13Fs sees Wall Street’s billionaire investors further trimming their stakes in the AI ​​darling. NVIDIA (NVDA 4.05%).

Nvidia has become the hardware backbone of the artificial intelligence movement

Since 2023, Nvidia shares have risen 709% through the close on August 14, representing an increase in market capitalization of more than $2.5 trillion. Many billionaire investors and their funds have profited enormously from this uptrend.

The catalyst behind this historic win for a market-leading company is the company’s data center hardware. More specifically, Nvidia’s H100 graphics processing unit (GPU) has become the brain that drives the split-second decisions required in enterprise data centers that run generative AI solutions and train large language models. In 2023, Nvidia’s chips had a near-monopoly (98% share) of GPUs shipped to data centers, according to TechInsights.

The beauty of an in-demand product is the extraordinary pricing power that usually comes with it. Because demand for the H100 exceeds supply, Nvidia was able to increase the retail price of its AI GPU to $30,000-$40,000. The end result is a significant increase in the company’s adjusted gross margin.

But not all asset managers believe that Wall Street’s leading AI provider still has enough gas in the tank to offer investors the success they desire.

Billionaire asset managers sold Nvidia shares for the third consecutive quarter

According to the 13Fs newly filed on August 14, seven prominent billionaire asset managers were sellers of Nvidia shares in the quarter ended June (number of shares sold in parentheses):

• Ken Griffin of Citadel Advisors (9,282,018 shares)
• David Tepper of Appaloosa (3,730,000 shares)
• Stanley Druckenmiller of the Duquesne Family Office (1,545,370 shares)
• Cliff Asness of AQR Capital Management (1,360,215 shares)
• Israel Englander of Millennium Management (676,242 shares)
• Steven Cohen of Point72 Asset Management (409,042 shares)
• Philippe Laffont from Coatue Management (96,963 shares)

During the March quarter, eight billionaires – nine if you count Renaissance Technologies’ Jim Simons, who died in May – sold Nvidia shares, and eight select billionaires also sold their shares in the quarter ending December.

While profit-taking after a monstrous run-up is one logical explanation for this exodus of billionaire investors, there are nearly half a dozen other factors that could shed more light on why asset managers keep seeking the exit.

Image source: Getty Images.

Five reasons why billionaires can’t stop selling Nvidia stock

History is perhaps the clearest reason why billionaires are increasingly retiring. Every new technology and trend of the last 30 years has fought its way through an early-stage bubble.

Put another way, investor expectations for adoption and utility have far exceeded reality for every exciting innovation or trend of the past three decades. Since most companies lack a clearly defined plan for how to generate a positive return on their AI investments, it’s likely that AI is the next in a long line of bubbles that represent the next big thing. When the AI ​​bubble bursts, no stock is likely to be hit harder than Nvidia.

The expectation of a significant increase in competition is another reason why billionaires might dump their Nvidia shares. Given the huge market for AI, numerous external competitors are entering the market with their own AI GPUs.

In addition, Nvidia’s four largest customers by net revenue are internally developing AI chips for their data centers. These complementary chips will minimize the “footprint” in high-performance data centers for Nvidia’s hardware.

Third, billionaires wisely do not overlook the cap set by regulators. In 2022 and again in 2023, U.S. regulators imposed export restrictions on Nvidia’s powerful AI chips to China. After the first round of restrictions in 2022, Nvidia developed the toned-down H800 and A800 chips for the world’s second-largest economy. Unfortunately, these GPUs were added to the export restriction list last year. These restrictions could cost Nvidia billions of dollars in quarterly revenue.

Data on NVDA shares sold by insiders from YCharts.

A fourth catalyst behind this ongoing billionaire sell-off may have to do with the lack of buying we’ve observed from company insiders. No board member or executive has purchased Nvidia shares on the open market since December 2020. Meanwhile, CEO Jensen Huang has been selling his company’s stock in large quantities since mid-June.

While not all insider selling is bad news—some sales may be for tax reasons—the complete lack of buying activity suggests that none of Nvidia’s executives are convinced the stock represents good value.

Finally, Nvidia’s valuation is a stain. Although its price-to-earnings (P/E) ratio suggests that shares may actually be cheap, its trailing-12-month (TTM) price-to-sales (P/S) ratio in June reached levels that rival the TTM P/S peaks of companies like Cisco systems And Amazon before the dotcom bubble burst.

Despite the euphoria surrounding artificial intelligence, the actions of some of Wall Street’s brightest investment minds suggest trouble is ahead.