Palantir Stock vs. Nvidia Stock: Smart Billionaires Buy One and Sell The Other (Hint: It May Surprise You)

Key Points

• Hedge funds led by billionaires Israel Englander and Chris Rokos sold Nvidia and bought Palantir stock in the first quarter.

• Nvidia is the market leader in data center GPUs and generative AI networking gear, and the current stock price is reasonable.

• Palantir is a leader in decision intelligence and AI platforms, but it’s also the most expensive stock in the S&P 500 by a wide margin.

• 10 stocks we like better than Nvidia ›

Nvidia (NASDAQ: NVDA) shares are up 1,100% since January 2023, while Palantir Technologies (NASDAQ: PLTR) shares have advanced 2,360%. But the following hedge fund managers sold the former and bought the latter in the second quarter, a surprising move given that Wall Street analysts generally think Palantir is overvalued.

• Billionaire Israel Englander at Millennium Management sold 1.1 million shares of Nvidia, reducing his position 12%. He also bought 3.6 million shares of Palantir, increasing his position 282%.
• Billionaire Chris Rokos at Rokos Capital Management sold 283,544 shares of Nvidia, reducing his position 14%. He also added 103,409 shares of Palantir, increasing his position 185%.

Importantly, both hedge funds outperformed the S&P 500 (SNPINDEX: ^GSPC) over the past three years, which makes Englander and Rokos good sources of inspiration for individual investors. Here’s what you should know about Nvidia and Palantir.

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Nvidia: The stock Englander and Rokos sold in the second quarter

Nvidia reported strong first-quarter financial results. Revenue rose 69% to $44 billion on robust demand for artificial intelligence (AI) infrastructure, and non-GAAP net income increased 33% to $0.81 per diluted share. Earnings would have grown faster had it not been for new export restrictions on China, but President Trump has since relaxed those restrictions.

The investment thesis for Nvidia centers on its essential role in the AI market. The company is best known for its dominance in data center graphics processing units (GPUs), chips used to accelerate AI workloads. But the company is also the leader in generative AI networking gear, and it has a burgeoning cloud software and services business.

Nvidia’s competitive advantages lie in technical expertise and switching costs. Specifically, its computing systems consistently outperform rival systems at the MLPerf benchmarks, objective tests that measure AI technologies across training and inference. And its CUDA software is the industry’s most comprehensive suite of development tools for AI applications, meaning programmers are unlikely to switch to alternative hardware.

Grand View Research estimates that spending across AI hardware, software, and services will increase at 36% annually through 2030, and Nvidia is perhaps better positioned than any other company to capitalize on that explosive growth. Wall Street expects its earnings to increase at 30% annually over the next three years. That makes the current valuation of 57 times earnings look reasonable and leaves room for upside.

So why did Englander and Rokos sell Nvidia? My guess is simple profit-taking. Regardless, readers should not assume the money managers have lost confidence in the chipmaker. Excluding options, Nvidia is still a top 10 holding in both hedge funds. I think patient investors can own this stock with confidence today.

Palantir: The stock Englander and Rokos bought in the second quarter

Palantir reported impressive second-quarter financial results. Its customer count increased 43% to 849 and the average spend per existing customer increased 28%. In turn, revenue rose 48% to $1 billion, the eighth straight acceleration, and non-GAAP net income jumped 77% to $0.16 per diluted share. Investors have reason to believe the company can keep its momentum.

Palantir has a competitive advantage in its unique software architecture, which is built around an ontology, a framework that connects data to actions to improve decision-making. Users can query the ontology with analytical tools and machine learning (ML) models to surface insights that improve over time. Chief Technology Officer Shyam Sankar says ontology-based software gives the company a “unique moat and a massive lead” in the AI market.

Indeed, Forrester Research recently recognized Palantir as a technology leader in AI/ML platforms. And the International Data Corporation has recognized its leadership in decision intelligence platforms. That leaves Palantir in a good position. Spending on AI platforms is forecast to increase at 39% annually through 2030, while spending on decision intelligence platforms is projected to increase at 15% annually.

Nevertheless, Palantir has an absurdly rich valuation. The stock currently trades at 120 times sales, the highest multiple in the S&P 500 by a wide margin. The next closest company is Nvidia at 29 times sales. That means Palantir stock could drop 75% and it would still be the most richly valued member of the S&P 500.

So why did Englander and Rokos buy the stock? I can only guess, but perhaps they hoped to turn a quick profit. That Palantir has returned 2,360% in less than three years makes the stock a tempting momentum play. Regardless, prospective investors should avoid Palantir until shares are more reasonably priced, or at least keep positions in the stock very small until the valuation drops out of the stratosphere.

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Trevor Jennewine has positions in Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.