There's seemingly no hotter trend right now artificial intelligence (AI). By using software and systems instead of people, and allowing these systems to evolve over time without human intervention to become more proficient at their tasks, AI has a broad use case that covers virtually every sector and industry.
But what is arguably an even more familiar group of stocks for Wall Street and investors are companies that implement stock splits.
A 'stock split' is an event that allows a publicly traded company to cosmetically change its share price and the number of shares outstanding by the same amount. I say “cosmetic” because stock splits don't change a company's market capitalization or operating performance.
Most investors tend to focus on stock forward splits, which are intended to lower the nominal share price of a publicly traded company, making it more affordable for people who don't have access to stock purchases from their broker. Since mid-2021, nearly a dozen high-profile companies have completed stock splits, including AI kingpin Nvidia (NASDAQ: NVDA).
However, Wall Street's brightest minds aren't necessarily enamored with the “infrastructure backbone” of the artificial intelligence revolution. During the quarter ending in December, billionaires were active sellers of Nvidia stock, instead piling into two recent stock split stocks.
Billionaire investors sent artificial intelligence stock Nvidia to the chopping block
Nvidia shares are up nearly 470% since the start of 2023. The clear catalyst behind the outperformance is the A100 and H100 graphics processing units (GPUs), which power the AI-accelerated data centers. In particular, Nvidia's H100 GPU is responsible for training large language models and powering generative AI solutions.
With the chips in high demand, Nvidia has enjoyed breathtaking GPU pricing. Data center segment revenue rose 217% in fiscal 2024 (ending January 28), while revenue costs across all segments rose a much more modest 43%.
Despite these advantages, eight billionaire investors have cut their respective fund's stakes in Nvidia during the fourth quarter, including (total shares sold in brackets):
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Israel Englander of Millennium Management (1,689,322 shares)
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Jeff Yass of Susquehanna International (1,170,611 shares)
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Steven Cohen of Point72 Asset Management (1,088,821 shares)
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David Tepper of Appaloosa Management (235,000 shares)
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Philippe Laffont of Coatue Management (218,839 shares)
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Chase Coleman of Tiger Global Management (142,900 shares)
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John Overdeck and David Siegel of Two Sigma Investments (30,663 shares)
The scarcity of Nvidia's GPUs is the main reason data center sales more than tripled last year. With the company increasing production of H100 GPUs and new companies entering the playing field, GPU scarcity will be less of a topic of conversation in the second half of this year. Billionaires sending Nvidia to the chopping block may rightly anticipate a decline in the company's pricing power and gross margin.
In addition to an increase in external competition, Nvidia could face enormous challenges from internal competitors. Four “Magnificent Seven” components account for about 40% of Nvidia's net sales. Unfortunately, all four of these market leaders develop their own GPUs. There's a real possibility that Nvidia's orders from its top customers will decline significantly in the coming years.
History could be the other big catalyst that caused an exodus of billionaires from Nvidia in the quarter ending in December. There hasn't been a next-big-thing investment or innovation in thirty years that hasn't survived an early-stage bubble. Investors typically overestimate the adoption and acceptance of new technology, and artificial intelligence is unlikely to break this trend.
But while these eight billionaires were busy dumping Nvidia stock, quite a few were piling into two better-performing stock split stocks.
Walmart
The first stock split that was a favorite among billionaire investors in the fourth quarter is the retail giant Walmart (NYSE:WMT). Walmart executed a 3-for-1 forward split in late February.
All told, five of the prominent billionaires who sold Nvidia stock were buyers of Walmart stock, including (total shares purchased in brackets):
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Israel Englander of Millennium Management (1,416,174 shares)
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John Overdeck and David Siegel of Two Sigma Investments (540,004 shares)
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Jeff Yass of Susquehanna International (261,294 shares)
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Steven Cohen of Point72 Asset Management (150,570 shares)
From an investment perspective, the appeal of putting your money to work at Walmart has long been its size. It is a company with deep pockets that can purchase products in bulk. A lower unit price for most of its goods allows Walmart to undercut traditional grocers and local supermarkets on price.
To add to the above, the breadth of products Walmart offers in its stores is matched by only a few competitors. Walmart has evolved into a one-stop shopping experience for consumers looking for a good deal. With prevailing inflation on the rise again, Walmart is exactly the kind of company we expect to benefit.
Another reason why long-term investors tend to put their faith in Walmart stock is because it is a consumer goods company. It has basic necessity goods and services that will draw consumers to its stores no matter how well or poorly the U.S. economy and stock market perform. This leads to predictable operating cash flow year after year – and Wall Street Loves predictability.
While Walmart stock isn't cheap, its competitive advantages could deliver solid profits for investors in the long run.
Chipotle Mexican Grill
The other stock split that billionaires bought when Nvidia stock was jettisoned is a fast-casual restaurant chain Chipotle Mexican Grill (NYSE:CMG). Chipotle announced plans in June to implement a 50-for-1 split, assuming it receives approval from its shareholders.
During the quarter ending in December, three notable billionaire investors were buyers of Chipotle stock, including (total shares purchased in parentheses):
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John Overdeck and David Siegel of Two Sigma Investments (32,250 shares)
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Jeff Yass of Susquehanna International (15,900 shares)
Like Walmart, Chipotle offers investors a number of well-defined competitive advantages that have led to its long-term outperformance.
For starters, the company's food was a differentiator. Whenever possible, the company sources its vegetables locally and uses responsible meat that is free from routine antibiotics. Chipotle's management team learned long ago that consumers are willing to pay more for higher-quality food that doesn't end up in the freezer.
“Chipotlanes” are another big source of growth for the company. A 'Chipotlane' is a special drive-thru street for mobile orders. Equipping most new stores with these digital drive-thru lanes helps speed up orders and maintain a superior growth rate among fast-casual restaurant chains.
Perhaps Chipotle's biggest advantage is the most subtle of all: its menu. The company has deliberately kept the menu relatively small, so that staff can quickly prepare meals and shorten waiting times. A limited menu also makes it easier for Chipotle to create meaningful buzz when introducing new items.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill, Nvidia, and Walmart. The Motley Fool has one disclosure policy.
Forget Nvidia: Billionaires are selling it and buying these two stock splits instead was originally published by The Motley Fool
