Stan Druckenmiller is an incredible investor with a long track record of producing outsize gains in the financial markets. He worked with George Soros in the '90s, famously 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 down year 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 as of 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 cut his sizable position in Nvidia last quarter. And he had a good reason.
Nvidia's headquarters in Santa Clara, California. Image source: Nvidia.
The unprecedented run for Nvidia
Druckenmiller said he took an initial position in Nvidia before the launch of OpenAI's ChatGPT at the suggestion of one of his partners at Duquesne. Then, once ChatGPT was launched and grew its user base faster than any app in history, he increased the position substantially.
Since ChatGPT's launch until the end of March, Nvidia shares climbed 434% and the company's market cap increased by $1.84 trillion in those 16 months. To say it's been on a historic run would be an understatement.
Druckenmiller saw the potential for those types of returns, but he thinks the market might have fully priced in any further growth for Nvidia at this point. "A lot of what we recognized has become recognized by the marketplace now," he said in an interview on CNBC.
The billionaire remains bullish on the potential for further advancements in artificial intelligence (AI) and the business opportunities they can create long term. "AI may be a little overhyped now, but underhyped long term," he said.
As such, he cut his Nvidia position. We'll have to wait until Duquesne files its form 13F with the Securities and Exchange Commission to learn exactly how much of the stock Druckenmiller sold last quarter. He also noted that he sold several other positions in late March. That form is due by May 15, so the wait won't be long.
Should investors follow Druckenmiller's lead?
The current run in Nvidia's stock is fueled by spectacular financial results. Despite high expectations for the company, it has managed to beat those expectations more often than not. And continued demand from big tech companies for its data-center graphics processing units (GPUs) has many people excited about the company's future.
But it's unclear how long the chipmaker can continue to beat those lofty market expectations. Druckenmiller seems to think that the 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 ratio (P/E) of 37.5, so the market is expecting huge earnings growth for years to come. That's a big ask for a company that's already huge.
Nvidia has benefited from being well positioned in 2022, just before the surge in demand for AI chips. But it might not have a sustainable advantage. In particular, it suffers from heavy customer concentration. One customer accounted for 13% of all of its sales in fiscal 2024.
What's more, practically all of its biggest customers are designing their own chips for training their large language models and for customers to use on their cloud computing platforms. While some customers will continue to demand Nvidia chips, the biggest ones are weaning themselves off the company. That could hamper revenue growth and reduce gross margin, which has benefited from a supply shortage over the last year.
At its current valuation, Nvidia could find it hard to continue outpacing the overall market. There are better ways to invest in artificial intelligence right now. That said, Druckenmiller still thinks Nvidia will maintain an important spot in demand for AI over 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 has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
