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Billionaire Stan Druckenmiller has exited his massive Nvidia position. This is why.

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Billionaire Stan Druckenmiller has exited his massive Nvidia position.  This is why.

Stan Druckenmiller is an incredible investor with a long track record of making outsized profits in the financial markets. He worked with George Soros in the 1990s, famously shorting the British pound. At the same time, he ran his own hedge fund, Duquesne Capital Management, which delivered an average return of 30% per year in the thirty years he managed it, without a single negative year.

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 stock and options of just one company. Nvidia (NASDAQ: NVDA).

But Druckenmiller said he reduced his significant position in Nvidia last quarter. And he had a good reason.

Nvidia headquarters with a gray sign with the Nvidia logo on it in front.Nvidia headquarters with a gray sign with the Nvidia logo on it in front.

Nvidia’s headquarters in Santa Clara, California. Image source: Nvidia.

The unprecedented run for Nvidia

Druckenmiller said he took a top position at Nvidia before Nvidia’s launch ChatGPT from OpenAI at the suggestion of one of his partners at Duquesne. Once ChatGPT launched and grew its user base faster than any app in history, it increased its ranking significantly.

Since ChatGPT’s launch through the end of March, Nvidia’s shares have risen 434% and the company’s market capitalization has increased by $1.84 trillion in those 16 months. To say it has been a historic run would be an understatement.

Druckenmiller saw the potential for these kinds of returns, but he thinks the market had fully priced in any further growth for Nvidia at this point. “A lot of what we recognized is now being recognized by the market,” he said in an interview on CNBC.

The billionaire remains optimistic about the potential for further advances in artificial intelligence (AI) and the business opportunities it can create in the long term. “AI may be a little overhyped now, but it will be underhyped in the long term,” he says.

As such, he eliminated his Nvidia position. We’ll have to wait until Duquesne files his Form 13F with the Securities and Exchange Commission to find out exactly how much of Druckenmiller’s stock sold last quarter. He also noted that he had sold several other positions in late March. That form must be ready by May 15, so the wait won’t be long.

Should investors follow Druckenmiller’s example?

The current run on Nvidia stock is fueled by spectacular financial results. Despite the high expectations for the company, it has managed to exceed those expectations more often than not. And continued demand from major technology companies because of the graphics processing units (GPUs) in the data center, many people are excited about the future of the company.

But it’s unclear how long the chipmaker can continue to beat these lofty market expectations. Druckenmiller seems to think that expectations for the company have reached an appropriate level and does not expect the stock to outperform, based on the current price. Nvidia has a price-to-earnings (P/E) ratio of 37.5, so the market expects huge earnings growth in the coming years. That’s a big ask for a company that’s already huge.

Nvidia has benefited from good positioning in 2022, just ahead of the surge in demand for AI chips. But it may not have a lasting benefit. It mainly suffers from a strong customer concentration. One customer accounted for 13% of all sales in fiscal year 2024.

In addition, virtually all of the largest customers are designing their own chips to train their large language models and for customers to use on their cloud computing platforms. While some customers will continue to demand Nvidia chips, the largest customers are pulling away from the company. That could hinder sales growth and reduce gross margin, which has benefited from a supply shortage in the past year.

At its current valuation, Nvidia could find it difficult to continue beating the overall market. There are currently better ways to invest in artificial intelligence. That said, Druckenmiller still thinks Nvidia will maintain an important place in AI demand in the long term. He said, “I’ll be very surprised if I’m not an Nvidia owner in the next 10 years.”

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has one disclosure policy.

Billionaire Stan Druckenmiller has exited his massive Nvidia position. This is why. was originally published by The Motley Fool