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.
