Does billionaire Ken Griffin know something Wall Street doesn't? The Citadel Chief Sold More Than 80% of His Broadcom Stock and Is Switching to Another Artificial Intelligence (AI) Stock-Split Stock Instead
Ken Griffin's fund, Citadel, is a “pod shop” in which the firm allocates capital to mini-teams that have wide autonomy over what they invest in.
In the second quarter, Citadel dumped most of its position in custom artificial intelligence chipmaker Broadcom.
The company jumped into one of the most prominent AI stocks on the market.
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One of the richest people in the world, Ken Griffin, has an estimated net worth of over $50 billion, according to Forbes, thanks to his career in finance. The Harvard graduate founded Citadel in 1990 and has grown the company into one of the largest hedge funds in the world and a major market maker.
Even though the company owns thousands of shares, investors are always curious about what the “smart money” on Wall Street is up to. In the second quarter of the year, Citadel dumped most of its stake in the custom chipmaker Broadcom(NASDAQ:AVGO) and instead switched to another popular artificial intelligence (AI) stock.
The “Magnificent Seven” have become household stocks because of their massive technology holdings, market caps of more than $1 trillion, and because investors expect them to be the big winners from the artificial intelligence boom. Broadcom was not part of the Magnificent Seven, but has recently emerged as a comparable company. The stock price is up about 91% in the past year and now has a market cap of about $1.63 trillion.
Image source: Nvidia.
Broadcom makes custom chips for AI workloads that include hyperscalers like OpenAI, AlphabetAnd Metaplatforms have taken a great interest in it. While Nvidia(NASDAQ: NVDA) is the premier pick-and-shovel play for AI, creating graphics processing units that can perform multiple tasks at once, Broadcom focuses on application-specific integrated circuits (ASICs) that make one particular task more efficient. For example, Meta used the chips it designed with Broadcom specifically for its AI models aimed at generating ads and organic content.
Wall Street analysts are still bullish on Broadcom and its custom AI chips. Mizuho analyst Vijay Rakesh recently reiterated his outperform rating on the stock and issued a $410 price target, implying an upside of 21% from current levels. Calling Broadcom the “King of AI Custom Silicon,” Rakesh sees ASIC's revenues rising and the company gaining broader interest in the AI space.
In the second quarter, Citadel sold about 82% of its long position in Broadcom. Several reasons can explain the sale. The company trades at 50 times forward earnings. Broadcom also still has a fairly small customer list in its custom chip business. While those few customers could potentially generate tens of billions in revenue for the company over time, things could become problematic if AI infrastructure spending dries up. It's also entirely possible that Citadel simply makes a profit after a good run.
While Citadel sold the custom chipmaker, the fund piled into AI chip king Nvidia. In the second quarter, Citadel more than quadrupled its position in Nvidia and now has a long position of more than 8 million shares.
Now I caution investors not to blindly follow the smart money. Citadel operates a “pod shop,” meaning it allocates capital to small teams of portfolio managers, who then have broad autonomy to invest as long as they follow certain Citadel guidelines. This means that Griffin doesn't make all of the company's investment decisions, although he does have broad influence over the company and likely dictates who the company hires. Hedge funds also tend to focus on a 12- to 18-month time horizon, potentially trying to trade a stock rather than thinking long-term.
Nvidia has had a volatile year due to the trade war between the US and China, an important market where Nvidia previously did business. Nvidia and CEO Jensen Huang have also had to work closely with the Trump administration after the government told Nvidia it would need export licenses to sell certain chips in certain countries, such as China.
Over the past six months, Nvidia shares have recovered more than 90%. Although Nvidia's relationship with the Trump administration and China is still fluid, if geopolitical tensions were to ease and the Chinese market opened, Nvidia could generate billions in additional revenue as early as the current quarter.
But the big question investors are grappling with has to do with AI demand and spending, and whether or not the industry needs to catch its breath. Nvidia alone has invested a ton in other AI stocks—particularly many of its customers—and the company recently announced a $100 billion investment in OpenAI. The bears find this quite strange and suggest that Nvidia is pumping in money to prop up a sector, while the bulls say people are underestimating how much demand there will be for AI.
Of course, if you believe in AI and the continued spending on AI infrastructure, the decision to invest in Nvidia is an easy one. With the stock trading at over 41 times expected earnings, it looks more expensive, especially with a market cap of nearly $4.7 trillion. But it's hard to say what will disrupt thematic trading in AI in the near term. Since Citadel bought the stock months ago, the fund has done well on the investment.
I think Nvidia will be relevant for decades to come and AI is here to stay, but the exact path may be difficult to predict, so I would advise bullish investors to use dollar-cost averaging when buying the stock.
Consider the following before buying shares in Nvidia:
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Bram Berkowitz has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Does billionaire Ken Griffin know something Wall Street doesn't? The Citadel Chief Sold More Than 80% of His Broadcom Stock and Instead Switches to Another Artificial Intelligence (AI) Stock-Split Stock was originally published by The Motley Fool
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