Stan Druckenmiller is an incredible investor with a long track record of producing outsized gains in the financial markets. He worked with George Soros in the 1990s, shorting the British pound. At the same time, he ran his own hedge fund, Duquesne Capital Management, which produced an average return of 30% per year without a single year of decline in the 30 years he operated it.
Since closing the hedge fund in 2010, Druckenmiller has managed his personal wealth through the Duquesne Family Office, which held about $3.35 billion at the end of last year. Nearly $550 million of that amount was held in stocks and options of a single company, Nvidia (NASDAQ:NVDA).
But Druckenmiller said it eliminated its large position in Nvidia last quarter. And he had good reason.
The unprecedented run for Nvidia
Druckenmiller said he took an initial position in Nvidia before the launch of OpenAI ChatGPT on the suggestion of one of his associates at Duquesne. Then, once ChatGPT launched and grew its user base faster than any app in history, it increased its position significantly.
From ChatGPT’s launch through the end of March, Nvidia shares soared 434% and the company’s market cap increased by $1.84 trillion during those 16 months. To say that this is a historic journey would be an understatement.
Druckenmiller saw the potential for this type of return, but he believes the market could have fully priced in any additional growth from Nvidia at this point. “A lot of what we recognized is now recognized by the market,” he said in an interview on CNBC.
The billionaire remains optimistic about the potential for further advancements in artificial intelligence (AI) and the business opportunities they can create in the long term. “AI may be a little overrated now, but underrated in the long term,” he said.
As such, he eliminated his position on Nvidia. We’ll have to wait until Duquesne files its Form 13F with the Securities and Exchange Commission to find out exactly how much of Druckenmiller stock sold last quarter. He also said he sold several other positions at the end of March. This form must be submitted before May 15, so the wait will not be long.
Should investors follow Druckenmiller’s lead?
The current rise in Nvidia shares is fueled by spectacular financial results. Despite high expectations for the company, it managed to exceed those expectations more often than not. And continued demand from big tech companies for its data center graphics processing units (GPUs), many people are excited about the company’s future.
But it’s not yet clear how long the chipmaker can continue to exceed high market expectations. Druckenmiller seems to think expectations for the company have reached an appropriate level and doesn’t see the stock outperforming, based on its current price. Nvidia has a forward price-to-earnings (P/E) ratio of 37.5, so the market is expecting huge earnings growth for the coming years. That’s a big ask for an already huge company.
Nvidia benefited from a good positioning in 2022, just before demand for AI chips soared. But this might not provide any lasting benefit. It suffers in particular from a high concentration of customers. One customer accounted for 13% of all its sales in fiscal 2024.
Additionally, virtually all of its largest customers design their own chips to train their large language models and which customers can use on their cloud computing platforms. While some customers will continue to demand Nvidia chips, the biggest are weaning themselves off the company. That could dampen revenue growth and reduce gross margin, which has benefited from a supply shortage over the past year.
At its current valuation, Nvidia may struggle to continue to outperform the broader market. There are better ways to invest in artificial intelligence right now. That said, Druckenmiller still believes Nvidia will maintain an important place in AI demand in the long term. He said: “I will be very surprised if I don’t own Nvidia on and off for the next 10 years.”
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool Ranks and Recommends Nvidia. The Mad Motley has a disclosure policy.
Billionaire Stan Druckenmiller has eliminated his massive position in Nvidia. Here’s why. was originally published by The Motley Fool
