The AI Stock Surge: Profits and Caution from a Wall Street Legend

In the past two years, artificial intelligence (AI) has become a significant focus on Wall Street. AI systems can not only improve their existing tasks but also learn new ones without human help. This flexibility provides AI with vast potential across different industries.

According to a bold prediction by analysts at PwC, the AI boom could add a staggering $15.7 trillion to the global economy by the end of the decade. This towering potential is a key factor driving up AI stocks since the beginning of 2023.

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Stanley Druckenmiller Sells High-Profile AI Stocks

Despite the excitement around AI, not everyone believes these stocks are still worth buying. Some influential investors, like billionaire Stanley Druckenmiller, are cashing out after making substantial gains. By the end of September, Druckenmiller managed almost $3 billion in assets at Duquesne Family Office, distributed across 75 different investments. While he still holds a few AI stocks, he has sold his shares in major players like Nvidia (NASDAQ: NVDA) and Palantir Technologies (NASDAQ: PLTR).

At the beginning of 2024, Duquesne owned 6,174,940 shares of Nvidia, following a historic 10-for-1 stock split that occurred after trading ended on June 7. However, by September 30, all of those shares had been sold.

Additionally, during the third quarter, Druckenmiller’s fund unloaded 728,255 shares of Palantir, effectively reducing its stake by nearly 95%.

What’s driving this decision to sell? It’s likely a classic case of profit-taking, given that Nvidia and Palantir have both seen remarkable gains year-to-date, rising 172% and 369% respectively as of December 20. Such significant increases often prompt investors to secure their profits.

Yet, there may be deeper concerns prompting Druckenmiller’s moves. Historically, technology innovations often experience a cycle of excitement followed by a downturn. Each major advancement, starting with the internet boom, has required years to fully mature.

Investors frequently underestimate the time it will take for new technologies to gain mainstream use. Despite significant investments in data centers, many companies lack clear strategies for turning a profit from AI. This uncertainty could suggest that AI represents a potential bubble for investors.

Valuation remains another pressing concern for both Nvidia and Palantir. In mid-2023, Nvidia’s price-to-sales (P/S) ratio soared above 40, a level reminiscent of businesses prior to the dot-com bubble burst. Palantir’s valuation is even more troubling, trading at a record-high P/S ratio of 73. History indicates these levels are unsustainable.

While Nvidia is projected to maintain its leadership in AI GPUs and Palantir faces little competition, significant pullbacks in stock prices seem increasingly likely for both firms.

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Druckenmiller Invests in a Rising Pharmaceutical Star

While Druckenmiller is selling off AI investments, he is simultaneously increasing his position in Teva Pharmaceutical Industries (NYSE: TEVA), one of 2024’s standout pharmaceutical stocks. Teva’s shares have rallied 112% this year, and Druckenmiller’s fund added 1,427,950 shares during the quarter ending in September.

Teva faced significant challenges over the past eight years, accumulating high debt from its purchase of Actavis in 2016 and dealing with extensive litigation related to the opioid crisis. These issues weighed heavily on its stock price.

However, recent strategic changes and legal settlements have rejuvenated Teva’s image on Wall Street. Notably, the company resolved its opioid litigation with a $4.25 billion settlement involving 48 states, distributed over 13 years. Part of this settlement includes supplying up to $1.2 billion worth of Narcan, a generic overdose reversal drug.

Additionally, Teva has shifted its focus to brand-name therapies, which offer higher margins and growth potential than generics. Sales of its leading brand-name drugs, Austedo for tardive dyskinesia and Ajovy for migraine prevention, increased by over 20% year-over-year in the third quarter when adjusted for currency.

Teva’s promising drug pipeline also contributes to the current bullish sentiment around its shares.