The artificial intelligence (AI) gold rush is in full swing, and Nvidia was one of the biggest winners so far. Its chips power the most advanced AI systems, including OpenAI’s ChatGPT, and its stock price rose 230% in the past year. But Goldman Sachs believes software and services companies could be the biggest beneficiaries in the long run.
Several billionaires on Wall Street appear to be thinking along the same lines. The hedge fund managers listed below sold their positions in Nvidia in the fourth quarter and reinvested capital into AI stocks that fit better into the software and cloud services categories.
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Millennium Management’s Israel Englander sold 1.7 million Nvidia shares, reducing his stake by 45%.
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Steven Cohen of Point72 Asset Management sold 1.1 million Nvidia shares, reducing his stake by 66%.
In the meantime, Englander and Cohen acquired shares in Amazon (NASDAQ:AMZN) And Palantir Technologies (NYSE:PLTR) The fourth quarter saw a rally in AI stocks, up 84% and 170%, respectively, over the past year.
1. Amazon
Amazon reported fourth-quarter results that beat Wall Street expectations. Revenue rose 14% to $170 billion, the third straight quarter in which growth accelerated from the previous quarter. This was primarily due to momentum in advertising and retail, but cloud computing sales also increased compared to the previous quarter. Meanwhile, GAAP net income improved to $1.00 per diluted share, compared to $0.03 per diluted share a year ago.
Given its strong presence in three markets, Amazon is expected to maintain this momentum. It operates the world’s most popular e-commerce marketplace by monthly visitors and the largest online marketplace in North America and Western Europe by revenue. Amazon is also the largest retail advertiser and the third largest ad tech company in the world. And Amazon Web Services (AWS) is the largest provider of cloud infrastructure and platform services.
This puts Amazon on track for double-digit revenue growth through 2030. I say this because the online retail, digital advertising, and cloud computing markets are expected to grow at 8%, 16%, and 14% annually, respectively. during this period. In fact, given these tailwinds, Wall Street expects Amazon to grow its revenue by 11% annually over the next five years.
However, Amazon could surprise Wall Street depending on how successfully it monetizes artificial intelligence (AI), particularly in its cloud computing business. The company has developed custom chips for AI training and inference called Trainium and Inferentia. These chips can’t outperform Nvidia’s graphics processing units (GPUs), but they are more cost-effective in certain situations and could bring more business to AWS.
Additionally, Amazon Bedrock is a cloud service that allows companies to customize large language models and build generative AI applications. Likewise, Amazon Q is a conversational business assistant powered by generative AI to search and summarize information from various internal and external data sources. The chatbot can also answer questions and automate tasks such as writing blogs and social media posts. Taken together, these products could lead to faster-than-expected sales growth for Amazon.
Shares currently trade at 3.4 times sales. This is a tolerable valuation if the Wall Street consensus is correct, and a more reasonable valuation if the company manages to grow revenue faster than 11% per year. Personally, I think Amazon is a worthwhile long-term investment given its current price.
2. Palantir Technologies
Palantir reported reasonably good financial results in the fourth quarter, beating revenue expectations and meeting bottom-line expectations. The number of customers increased by 35% to 497 and the average existing customer spent 8% more. In turn, revenue increased 20% to $608 million, reflecting 32% growth in commercial sales and 11% growth in government sales. Non-GAAP net income doubled to $0.08 per diluted share.
CEO Alex Karp commented on Palantir’s AI ambitions in his annual letter to shareholders. “Every part of our organization is focused on the launch of our artificial intelligence platform (AIP), which went from prototype to product in just a few months. And our momentum with AIP is now contributing significantly to new sales and new customers,” he wrote. AIP brings support for large language models to Palantir’s commercial platform Foundry.
To be more specific, Palantir develops software that helps companies integrate and analyze data, develop and manage machine learning (ML) models, and build applications that improve decision-making. Forrester Research has recognized Palantirs Foundry as a leading AI/ML platform. AIP expands Foundry to enable customers to develop and leverage generative AI to improve business outcomes. For example, one of the largest U.S. healthcare organizations uses AIP to create shift schedules that take into account employee preferences, decision costs, and demand forecasts.
Additionally, the U.S. Army recently selected Palantir to build its Titan ground station system, which uses AI/ML to rapidly process data received from sensors at terrestrial, aerial, high-altitude and extraterrestrial locations. The 24-month contract is worth $178 million, so won’t have a significant impact for Palantir, but it highlights its versatility and the deal could lead to further deals with the US government.
Going forward, the data analytics market is forecast to grow 27% annually through 2030. While I doubt Palantir will achieve this pace given its past performance and small customer base, the tailwinds are still having a positive impact on the company. Wall Street expects Palantir to grow revenue 21% annually over the next five years.
In this context, the current valuation of 23.5 times sales seems expensive, especially when the three-year average is 17.8 times sales. Also worth noting, Palantir currently has a consensus Sell rating from Wall Street analysts and the stock has a median price target of $20.50 per share, representing a 10% decline from the current price of 22.80 US dollars per share means. I would stay away from Palantir until the stock trades at a more reasonable valuation.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions at Amazon, Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends Amazon, Goldman Sachs Group, Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.
Billionaires Sell Nvidia Stock, Buy Two Stocks With Powerful Artificial Intelligence (AI) Instead was originally published by The Motley Fool