Hedge Funds Ditch Nvidia for These 2 Red-Hot AI Stocks – Here’s Why You Should Too!

In a surprising yet calculated move, hedge fund billionaires are strategically pivoting away from Nvidia (NVDA). Instead, they are increasingly favoring Alphabet (GOOGL) and ServiceNow (NOW) amidst the evolving dynamics in the AI sector. Despite Nvidia’s dominant position and outstanding performance in the past two years, top money managers show restraint in holding large positions due to sky-high valuations and market saturation. This shift is highly relevant for investors eager to capitalize on the next AI wave, providing invaluable insights into where market moguls are placing their high-stakes bets.

Editor's Note: Analysis and insight for this article were originally sourced from our friends at The Motley Fool

Nvidia (NVDA): Still Strong, but Facing New Winds

Nvidia (NVDA): Hedge Funds Shift Focus Despite Strong Performance

Nvidia has undoubtedly been one of Wall Street’s hottest stocks, marked by stellar performance over the last two years. However, high valuations and a saturated market have led professional money managers to take a more cautious stance. Recent data reveals that compared to its weight in the S&P 500, Nvidia was the second-most under-owned big tech stock across institutional portfolios in the first quarter, according to Morgan Stanley. This speaks volumes about where the smart money is flowing.

Several hedge fund billionaires exemplify this trend. Louis Bacon of Moore Capital Management sold 2,006 shares of Nvidia, reducing his stake by 19%, while Israel Englander of Millennium Management offloaded 720,004 shares, lowering his stake by 35%. David Shaw of D.E. Shaw and Paul Tudor Jones of Tudor Investment also significantly reduced their holdings, cutting down their positions by 38% and 78%, respectively. Yet, it’s crucial to note that all these billionaires still maintain some exposure to Nvidia, suggesting it is not considered a bad investment, but perhaps that better opportunities lie elsewhere.

Analyst Ratings and Overview

Here’s a breakdown of the analyst ratings for Nvidia:

Summary of Analysts’ Outlook: Analysts are overwhelmingly bullish on Nvidia, with 24 out of 34 ratings being Buy or Overweight. The average price target of $643.14 suggests a potential gain of 14.1% from the current price. Many analysts believe Nvidia’s dominance in the graphics processing unit (GPU) market, as well as its growing presence in artificial intelligence, datacenters, and autonomous vehicle markets, will drive future growth.

Alphabet (GOOGL): Doubling Down on AI and Digital Advertising

Alphabet (GOOGL): Generative AI and the Next Big Revenue Streams

Alphabet, the parent company of Google, flexes its muscles strongly in the AI arena with its twin growth engines—digital advertising and cloud infrastructure. Widely recognized as a leader in AI research, Alphabet’s subsidiary Google has been bringing its extensive AI expertise to bear across various business segments. Notably, the introduction of generative AI tools like Google Gemini adds a unique edge, helping advertisers optimize campaigns and profits while streamlining software development, data analytics, and threat detection.

Impressive Financial Metrics

Alphabet’s second-quarter financial results were nothing short of remarkable, beating expectations on both the top and bottom lines. Revenue increased by 14% to $84.7 billion, riding on steady sales growth in advertising and accelerated cloud services. Meanwhile, GAAP net income soared by 31%, hitting $1.89 per diluted share, thanks to the company’s disciplined cost-control measures.

Despite these optimistic reports, shares dipped post-earnings, potentially due to missed estimates in YouTube advertising revenue and near-term headwinds from AI infrastructure investments. However, this dip presents a reasonable buying opportunity for patient investors.

Looking ahead, digital ad spending is projected to grow at an annual rate of 8% through 2027, while cloud services spending is forecasted to increase at a 21% annual rate through 2030. These robust tailwinds should propel Alphabet to achieve double-digit revenue growth through the end of the decade, with earnings likely growing even faster as margins expand. Wall Street’s projections indicate a 16% annual earnings growth through 2026, suggesting that Alphabet, with its current 24.3 times earnings valuation, still offers a reasonable entry point for savvy investors.

Analyst Ratings and Overview

Here’s a breakdown of the analyst ratings for Alphabet:

Summary of Analysts’ Outlook: Analysts have a bullish outlook on Alphabet, with a consensus “Overweight” rating. The average price target of $3,343.14 implies a potential gain of 23.1% from the current price. The majority of analysts believe that Alphabet’s strong fundamentals, including its dominant position in search and online advertising, will drive future growth.

ServiceNow (NOW): The Workflow Management Maestro

ServiceNow (NOW): AI-Enhanced Workflow Dominance

ServiceNow stands out in the realm of workflow management software, boasting a comprehensive portfolio that includes leadership in IT service management (ITSM) and AI for IT operations. Beyond these verticals, ServiceNow provides solutions for customer service management, human resources, and robotic process automation. What sets ServiceNow apart is its early adoption and integration of AI capabilities, including conversational chatbots, intelligent document processing, and predictive analytics.

Financial Fortitude

ServiceNow’s second-quarter results further establish its financial strength. The company reported a 22% revenue increase to $2.5 billion and a 32% rise in non-GAAP net income per share, hitting $3.13. Importantly, ServiceNow maintained a stellar 98% renewal rate and saw a 32% increase in remaining performance obligation, pointing to robust future revenue growth.

This impressive performance is attributed to broad-based demand across its software portfolio, with 14 out of the 20 largest deals involving at least eight products. The introduction of Now Assist, a suite of generative AI capabilities, quickly became the fastest-growing new product in company history. CFO Gina Mastantuono highlighted that ServiceNow is just scratching the surface of its vast opportunities in generative AI.

Market Outlook and Investment Valuation

The ITSM market is expected to grow at a 9% annual rate through 2030. However, ServiceNow is well-positioned to outpace this growth due to its market leadership, expanding AI-driven solutions, and opportunities in adjacent software markets. Wall Street anticipates adjusted earnings to grow at an annual rate of 21% through 2026.

Despite the promising outlook, ServiceNow’s current valuation of 63.5 times adjusted earnings may appear steep. Keeping the stock on a watchlist for a more favorable entry point, closer to a P/E ratio of 40, could be prudent for discerning investors.

Analyst Ratings and Overview

Here’s a breakdown of the analyst ratings for ServiceNow:

Summary of Analysts’ Outlook: Analysts have a bullish outlook on ServiceNow, with a consensus rating of Overweight. The average price target of $634.41 implies a potential gain of 14.1% from the current price. Most analysts believe that the company’s strong fundamentals, including its leadership in the digital transformation space and its growing customer base, will drive long-term growth.

Key Takeaways for Savvy Investors

The shift of hedge fund billionaires from Nvidia to Alphabet and ServiceNow provides crucial insights for retail investors. While Nvidia remains a strong player, issues of market saturation and high valuations have prompted a reassessment. Meanwhile, Alphabet’s robust growth engines in digital advertising and cloud infrastructure, coupled with proven financial resilience and future potential, make it an attractive buy. ServiceNow’s pioneering AI-driven workflow solutions and robust financial metrics signify long-term success, although a more favorable entry point may be desirable.

By following these strategic shifts, investors can gain insights into potential high-return investments favored by market titans, allowing retail investors to strategically align their portfolios in the ever-evolving AI sector.