Stanley Druckenmiller was early to spot the potential for some of the biggest AI chipmakers in the market. He bought Nvidia (NASDAQ: NVDA) for his Duquesne Family Office portfolio in late 2022. He ultimately made hundreds of millions of dollars from that purchase, but he admitted he sold the stock too soon, fully disposing of the position in 2024.
Druckenmiller sold another big AI chip stock last quarter, Broadcom (NASDAQ: AVGO), fully exiting his position. At the same time, he purchased relatively large stakes in two other AI giants further down the AI compute supply chain: Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).
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Here’s why Druckenmiller may have sold Broadcom and bought the hyperscalers instead and whether you should follow his lead.
Stanley Druckenmiller, Duquesne Family Office chairman. Image source: Getty Images.
Selling the chipmaker and buying the hyperscalers
Druckenmiller looks for investment opportunities created by major shifts in the global economy and markets. Nvidia and AI chipmakers are one of the clearest recent examples.
That is to say, valuation is a lesser concern for Druckenmiller. So, the fact that Broadcom floated up to a P/E of 40 at one point last quarter likely didn’t have a huge impact on his decision to sell the stock. That said, the shares looked like a good value when he bought them in the prior quarter, below a forward P/E of 30.
Druckenmiller may have seen the trend toward hyperscalers taking more control of their own destinies last quarter, prompting him to add to Amazon and reestablish a position in Alphabet. The companies were raising capital through both debt and newly issued stock, spending heavily on new data centers to meet the growing demand for AI compute.
At first blush, that might seem to benefit a company like Broadcom, which makes networking chips as well as custom AI accelerator chips, including Alphabet’s Tensor Processing Units (TPUs). But it seems that Amazon, Alphabet, and other major customers are exerting more control over which chips make it into their data centers.
Amazon CEO Andy Jassy said the largest number of the new chips going into its data centers this year will be its own custom Trainium chips, not Nvidia GPUs or any other off-the-shelf solution. AlChip is the company behind the design for the newest generation of Trainium chips and also won the next-generation Trainium 4.
Alphabet said it’s seeing very strong demand for its TPUs and is even selling TPU systems to select external customers for their own data centers. Alphabet has long partnered with Broadcom for its TPU chips, but it recently signed a deal with Marvell for specialized inference TPUs.
AI customers are increasingly finding value in using the hyperscaler’s custom silicon solutions for both training and inference. And the hyperscalers are showing greater willingness to use multiple sources for those chips. The long-term trend favors the companies with the greatest control over which chips are made and by whom, and that power seems to be in the hands of the big hyperscalers.
The market is giving investors a great opportunity to buy
While Druckenmiller may not be overly concerned with valuation, it’s always better to buy a stock at a low valuation than at a high one, all else being equal. Right now, the market is offering investors the chance to buy Amazon and Alphabet at historically low P/E ratios. Amazon stock trades for just 20.5 times forward earnings expectations, while Alphabet trades for just 16.4 times forward earnings.
Those earnings multiples are depressed due to fears related to both companies’ capital spending. Amazon’s free cash flow fell into negative territory over the trailing 12 months, burning $7.6 billion over the last four quarters. Alphabet produced negative free cash flow for the first time as a publicly traded company last quarter, at negative $5.9 billion. That trend will worsen before it improves, as both have massive capital spending plans.
But both should produce strong returns on invested capital. They have huge backlogs of contracted revenue that they can start earning as soon as new data centers come online. Alphabet ended the quarter with $514 billion in remaining performance obligations. Amazon’s backlog ballooned to $496 billion. As such, they have good foresight into demand and the returns they can expect on their invested capital.
While other companies have stepped in to offer compute amid hyperscalers’ capacity shortages, investors can expect the majority of inference to eventually take place on the hyperscalers’ servers, where data and other applications are hosted. As a result, Amazon and Alphabet should be able to maintain very high utilization rates for their chips, producing strong operating results in the long run.
As companies exercise greater control over their supply, they are well-positioned to deliver strong returns for investors going forward.
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Adam Levy has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Broadcom, Marvell Technology, and Nvidia. The Motley Fool has a disclosure policy.
