Duquesne Family Office’s Druckenmiller is swapping one high-powered AI stock for another.
The fourth quarter has been packed with important data releases. In November, investors received hundreds of earnings reports from Wall Street’s most-influential businesses, the much-anticipated election results, and numerous economic data releases that offer clues as to the steps the nation’s central bank might take next.
But perhaps the most relevant data dump of them all came on Nov. 14. This was the deadline for institutional investors with at least $100 million in assets under management (AUM) to file Form 13F with the Securities and Exchange Commission. A 13F provides an easy-to-understand snapshot of which stocks Wall Street’s smartest money managers bought and sold in the latest quarter (in this instance, the quarter ended Sept. 30).
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Although no asset manager is more closely followed than Berkshire Hathaway CEO Warren Buffett, he’s far from the only billionaire known for their investing prowess. Billionaire Stanley Druckenmiller, who oversees almost $3 billion in AUM at Duquesne Family Office, also garners quite a bit of attention.
Druckenmiller is known for a balanced investment approach that involves multiple asset classes (stocks, bonds, stock options, and currencies), as well as long and short positions. Note, short positions aren’t going to be shown in a quarterly filed 13F.
What’s particularly noteworthy about Druckenmiller’s trading activity during the third quarter is what he did within the artificial intelligence (AI) arena. Specifically, he dumped one of Wall Street’s hottest AI stocks with a seemingly impenetrable moat in favor of another scorching-hot AI company.
Druckenmiller’s Duquesne sent nearly all of its Palantir shares to the chopping block
Stanley Druckenmiller and his team tend to be pretty active from one quarter to the next. Duquesne’s top-10 positions have only been held for an average of two quarters, while all 75 holdings, as of the end of September, have been held or an average of just 2.33 quarters.
But among the more than three-dozen stocks that were completely sold or reduced during the third quarter, arguably none stands out more than AI data-mining specialist Palantir Technologies (PLTR -3.87%). Duquesne entered the quarter with nearly 770,000 shares of Palantir and crossed the proverbial finish line holding just 41,710 shares, representing a reduction of roughly 95%!
At least some portion of this selling activity can likely be attributed to benign profit-taking. Shares of Palantir have soared by 335% on a year-to-date basis (as of the closing bell on Dec. 17), and Druckenmiller’s fund opened its nearly 770,000-share stake in Palantir at some point during the fourth quarter of 2023. Market-leading businesses rarely quadruple in under a year, so this marks the perfect occasion to cash in some chips.
This jaw-dropping rally in Palantir stock has been fueled by the company’s decisive shift to recurring profitability, as well as strong demand for its AI- and machine learning-driven Gotham and Foundry platforms. The former is relied upon by federal governments to gather data and plan/execute missions. Meanwhile, Foundry is a tool used by businesses to make sense of their data. The multiyear contracts Palantir receives from federal governments via Gotham is, for now, its primary profit driver.
But there may be more to Druckenmiller’s selling than just a simple ringing of the register.
For one, history hasn’t exactly been kind to next-big-thing innovations over three decades. While artificial intelligence has game-changing long-term potential, every leap forward in innovation has needed time to mature — and AI is unlikely to be the exception. If an AI bubble does take shape, Palantir stock would likely be caught in the downdraft.
Druckenmiller and his team may also be focused on the tangible ceiling for Gotham. While this segment is highly profitable, the solutions it provides are only available to the U.S. and its closest allies. This means the customer pool for Gotham is limited over the long run.
Lastly, Palantir’s valuation is concerning. Whereas some market-leading businesses have peaked at around 40 times trailing-12-month sales during previous bubbles, Palantir is valued at roughly 69 times its sales over the last 12 months. Even with its competitive moat, this looks to be an unsustainable valuation premium.
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Druckenmiller fancies Wall Street’s newest trillion-dollar AI stock
But just because Duquesne Family Office’s chief is fading one of Wall Street’s top-performing AI stocks, it doesn’t mean all artificial intelligence stocks are off-limits.
During the September-ended quarter, Druckenmiller’s fund added 33 new positions, one of which became Wall Street’s newest trillion-dollar stock last week. This scorching-hot stock, which Duquesne added 239,980 shares of in the third quarter, is none other than AI networking solutions specialist Broadcom (AVGO -6.91%).
Just as Nvidia‘s graphics processing units (GPUs) have become the clear top choice as the “brains” in enterprise data centers, Broadcom’s AI networking solutions are favored when connecting GPUs and minimizing tail latency. This is especially important for AI-driven software and systems where split-second decision-making is crucial.
In fiscal 2024 (Broadcom’s fiscal year ended on Nov. 3), the company recorded $12.2 billion in AI sales, representing 220% year-on-year growth. More importantly, CEO Hock Tan believes the company’s three biggest customers could spend between $60 billion and $90 billion on customized AI-application-specific integrated circuit (ASIC) chips over the next three years. It would appear that Broadcom’s AI journey is just getting started.
Keep in mind that more than $39 billion of Broadcom’s fiscal 2024 sales originated beyond AI networking solutions. It’s one of world’s key players in developing wireless chips and accessories used in next-generation smartphones. Additionally, Broadcom provides cybersecurity solutions, as well as optical sensors used in a variety of industries. The point being that Broadcom is a diversified tech company that could, in theory, navigate a potential AI bubble better than most AI stocks.
Druckenmiller and his top advisors might also be attracted to Broadcom’s favorable capital-return program. Since doling out its first-ever quarterly dividend in 2010, Broadcom’s payout has grown by a cool 8,329%, on a split-adjusted basis.
The one concern for Broadcom stock is whether shares have come too far, too fast. At 22 times trailing-12-month sales, Broadcom is trading at a 166% premium to its average price-to-sales ratio over the last five years. Expected sales growth of the mid-to-high teens in fiscal 2025 and 2026 simply may not be enough to support this level of valuation premium.
