Ken Griffin, one of the most successful hedge fund managers in history, slashed Citadel’s stake in Nvidia in the second quarter.
Billionaire Ken Griffin is the founder and CEO of Citadel Advisors, the most profitable hedge fund in history as measured by net gains, according to LCH Investments. That makes Griffin one of Wall Street’s most successful money managers, so investors should consider following his trades with quarterly Forms 13F.
In the second quarter, Griffin sold 9.2 million shares of Nvidia (NVDA 0.78%), reducing his exposure by 79%. Meanwhile, he bought 98,752 shares of Super Micro Computer (SMCI -0.68%), increasing his position by 96%. Currently, Citadel still has more capital invested in Nvidia than Supermcro, but the trades are noteworthy nevertheless because they may hint at a shift in sentiment.
Here’s what investors should know about each of these companies.
Nvidia
Nvidia is best known for its graphics processing units (GPUs), chips used to accelerate data center workloads like training large language models and running artificial intelligence (AI) applications. “Nvidia sets the pace for AI infrastructure worldwide. Without Nvidia GPUs, modern AI wouldn’t be possible,” according to analysts at Forrester Research.
Indeed, Nvidia has around 90% market share in AI chips, and analysts expect the same level of dominance for at least two or three years. That seems likely for two reasons.
First, developers prefer Nvidia GPUs because they are the fastest accelerators on the market, but also because they are backed by a more robust ecosystem of software development tools than competing products. Second, Nvidia provides adjacent data center hardware, including central processing units (CPUs) and network switches, designed for AI. The company also provides software and cloud services that support AI application development. That means Nvidia can innovate across the entire data center computing stack, which leads to better-performing systems with lower energy requirements, according to CEO Jensen Huang.
Importantly, when Ken Griffin was selling shares in the second quarter, Nvidia stock traded at an average valuation of 67 times earnings, which peaked around 79 times earnings. But Nvidia’s earnings more than doubled in the June quarter, which lowered its valuation multiple. The stock currently trades at 64 times earnings, a slight discount to where it was when Griffin was selling.
Additionally, Wall Street anticipates Nvidia’s earnings will grow at 37% annually over the next three years. That is an upward revision from the average consensus of 34% during the second quarter.
In other words, Nvidia shares are a bit cheaper, and earnings are expected to grow a bit faster versus when Ken Griffin was selling shares. Those changes make the stock more attractive, so Griffin may have added to Citadel’s position in Nvidia since the second quarter ended.
Super Micro Computer
Super Micro Computer manufacturers servers, including complete server racks equipped with storage and networking, to provide a turnkey solution for data center infrastructure. The company’s internal engineering capabilities and modular approach to product design allow it to bring new technologies to market more quickly than its competitors. That advantage has helped Supermicro secure a leadership position in AI servers.
Importantly, while the market will likely become more competitive as Dell Technologies and other equipment manufacturers lean into demand for AI infrastructure, Supermicro’s leadership in direct liquid cooling (DLC) technology may defend its position in AI servers. DLC can reduce data center power consumption by 40% versus traditional air cooling, so the percentage of liquid-cooled installations is expected to soar alongside AI server deployments.
Supermicro reported mixed financial results in the fourth quarter of fiscal 2024 (ended June 30). Revenue rose 143% to $5.3 billion. But gross margin fell nearly 6 percentage points to 11.2%, such that non-GAAP (generally accepted accounting principles) earnings increased only 78%, growing much slower than sales. That may signal waning pricing power amid increased competition, but management said gross margin will return to normal (14% to 17%) by the end of fiscal 2025.
Importantly, Ken Griffin was buying Supermicro stock in the second quarter, but his stance on the company may have changed since short-seller Hindenburg Research accused Supermicro of accounting manipulation in August. CEO Charles Liang said the accusations were “false or inaccurate statements.” But the company delayed filing its Form 10-K for fiscal 2024 and has yet to correct the problem.
For readers with déjà vu, Supermicro was fined $17.5 million in 2020 for infractions similar to those outlined by Hindenburg, including recognizing revenue prematurely and understating expenses. The incidents occurred between 2014 and 2017, and caused the company to file its 10-K for fiscal 2017 nearly two years after it was due, which resulted in the stock being temporarily delisted from the Nasdaq Stock Exchange.
In September, The Wall Street Journal reported that the Justice Department was investigating Supermicro based on allegations made by a former employee. The allegations are similar to those made by Hindenburg, but the probe is in its early stages, and details are scant. Nevertheless, investors should be aware of the risk.
Looking ahead, Statista estimates AI server sales will increase at 30% annually through 2033, and Wall Street anticipates Supermicro’s adjusted earnings will grow 54% over the next 12 months. Those estimates make the current valuation of 22 times adjusted earnings look cheap. However, given the overhanging regulatory issues, I would not be surprised if Ken Griffin has trimmed his position in Supermicro since the second quarter.
