Institutional investors have shown a growing caution towards holding significant positions in chipmaker Nvidia, as its shares continue to surge. According to Morgan Stanley, Nvidia was the second-most under-owned big tech stock across institutional portfolios in the first quarter, compared to its weight in the S&P 500. Notably, several hedge fund billionaires have contributed to this trend by selling Nvidia shares and increasing their positions in Alphabet or ServiceNow.
Louis Bacon of Moore Capital Management reduced his stake in Nvidia by 19% through the sale of 2,006 shares. Simultaneously, he initiated a position in Alphabet, which now ranks among his top 20 non-option holdings. Israel Englander of Millennium Management reduced his Nvidia stake by 35% through the sale of 720,004 shares, while increasing his position in ServiceNow by 728%. David Shaw of D.E. Shaw reduced his Nvidia stake by 38% through the sale of 1.4 million shares, and also increased his position in ServiceNow by 17%. Paul Tudor Jones of Tudor Investment reduced his Nvidia stake by 78% through the sale of 103,337 shares, while increasing his position in Alphabet by 347%.
It is important to note that all the mentioned billionaires still maintain exposure to Nvidia, indicating that their trades should not be interpreted as a negative reflection on the company’s investment potential. However, the exceptional returns of Alphabet and ServiceNow, which have seen growth rates of 174% and 179% respectively over the past five years, make them worthy of further consideration.
1. Alphabet:
Alphabet, the parent company of Google, holds two major growth engines. It is the largest digital advertising company and the third-largest cloud infrastructure provider. With its recognized leadership in artificial intelligence (AI) research, Alphabet leverages its expertise across both business segments. The company’s generative AI tools assist advertisers in campaign creation and profit optimization, while its Gemini models simplify software development, data analytics, and threat detection. These models can also be customized to create unique generative AI applications.
Alphabet reported strong financial results in the second quarter, surpassing expectations on both the top and bottom lines. Revenue increased by 14% to $84.7 billion, driven by steady sales growth in the advertising segment and accelerated sales growth in cloud services. The company’s disciplined cost control led to a 31% rise in GAAP net income to $1.89 per diluted share. CEO Sundar Pichai highlighted the success of their AI infrastructure and generative AI solutions, which have already generated billions in revenues and are being utilized by over 2 million developers.
Considering the projected annual growth rates of 8% for digital ad spending through 2027 and 21% for cloud services spending through 2030, Alphabet is well-positioned for double-digit revenue growth in the coming years. Wall Street analysts anticipate earnings to grow at a rate of 16% annually through 2026. With a reasonable valuation of 24.3 times earnings, even if Wall Street’s consensus estimate is accurate, Alphabet presents an attractive buying opportunity, especially as the stock is down 6% since the second-quarter report.
2. ServiceNow:
ServiceNow offers a wide range of workflow management software, with a strong presence in the IT service management (ITSM) and AI for IT operations markets. Additionally, the company provides solutions for customer service management, human resources service delivery, and robotic process automation. ServiceNow has been incorporating AI capabilities into its platform for several years, including conversational chatbots, intelligent document processing, and predictive analytics. Its latest addition, Now Assist, offers generative AI capabilities.
ServiceNow reported impressive financial results in the second quarter, surpassing expectations on both the top and bottom lines. Revenue grew by 22% to $2.5 billion, while non-GAAP net income increased by 32% to $3.13 per diluted share. The company’s renewal rate remained strong at 98%, and the rise in remaining performance obligation suggests robust revenue growth in the upcoming quarters. Management attributed their performance to broad-based demand across their software portfolio, with Now Assist becoming the fastest-growing new product in company history.
With the ITSM market expected to grow at a rate of 9% annually through 2030, ServiceNow is well-positioned for growth due to its market leadership in IT software, opportunities in adjacent software markets, and expanding suite of generative AI tools. Wall Street analysts anticipate adjusted earnings to grow at a rate of 21% annually through 2026. However, the current valuation of 63.5 times adjusted earnings appears expensive. While ServiceNow remains a remarkable company, it may be prudent to monitor the stock for now, particularly if the price-to-earnings ratio approaches a more reasonable level, closer to 40.