Wall Street’s Major Moves: Why Hedge Funds Favor Nvidia Over Palantir

This year, the S&P 500 index has grown by 26%, while the tech-focused Nasdaq Composite has increased by about 28%. A key driver behind these impressive market gains is the rise of artificial intelligence (AI).

Throughout 2024, notable stocks in the AI sector include data analytics firm Palantir Technologies (NASDAQ: PLTR) and leading semiconductor company Nvidia (NASDAQ: NVDA). Both have significantly outperformed the market, with Palantir’s shares climbing by 291% and Nvidia rising by roughly 179% (as of market close on November 29).

Given Palantir and Nvidia’s strong positions in AI, it may surprise some investors that many of Wall Street’s top analysts are currently favoring just one of these stocks.

Wall Street’s Investment Strategies for Palantir and Nvidia

Thanks to a resource known as the form 13F, regular investors can see what larger institutional investors are buying and selling. Below are the recent buying and selling activities of two prominent hedge fund managers during the third quarter:

• Ken Griffin (Citadel Advisors): In the quarter ending in September, Citadel Advisors sold 5,172,681 shares of Palantir, lowering its exposure by 91%. In contrast, Citadel increased its investment in Nvidia by 194%, acquiring over 4.7 million shares.
• David Shaw (D.E. Shaw): D.E. Shaw also reduced its holding in Palantir, selling 8.7 million shares, which reflects a 45% drop. Similar to Citadel, D.E. Shaw boosted its Nvidia position by more than 50%, purchasing nearly 6 million additional shares.

Let’s explore the factors that may have influenced these decisions to sell Palantir while buying Nvidia.

Image source: Getty Images.

Reasons Behind Selling Palantir

In April 2023, Palantir introduced its fourth major software offering, the Palantir Artificial Intelligence Platform (AIP). This launch has propelled Palantir into the spotlight in the AI industry, boosting its revenues across both commercial and public sectors while achieving significant profit margins. Although Palantir’s growth potential seems encouraging, a major factor for selling the stock is its valuation.

PLTR PS Ratio data by YCharts

Currently, Palantir trades with a price-to-sales (P/S) ratio of 61, indicating considerable valuation growth during 2024. It has emerged as one of the most expensive software-as-a-service (SaaS) stocks in its sector.

Many analysts argue that Palantir may be overvalued. Given the rapid increase in its stock price, it is understandable why Citadel and D.E. Shaw chose to cut back their holdings as an opportunity to secure profits.

Why Invest in Nvidia Now?

Nvidia is a crucial player in the current AI landscape. Its graphics processing units (GPUs) are essential for generative AI development.

The key factors supporting Nvidia’s growth in the coming years include increasing investments in AI infrastructure and the anticipated launch of the next generation of GPUs, named Blackwell.

Investors’ choice to buy Nvidia can also be attributed to its valuation. While Nvidia’s stock isn’t particularly cheap, its current price-to-earnings (P/E) and price-to-free-cash-flow (P/FCF) ratios align closely with historical averages. Given Nvidia’s growth and its strong market position for capturing additional share as demand for AI infrastructure rises, investors may view Nvidia as undervalued, making it an appealing buy-and-hold option.

Conclusion

While the strategies of selling Palantir and purchasing Nvidia make sense, the specific reasons behind these decisions by the portfolio managers remain uncertain.

As previously discussed in other articles, I believe that competition within the GPU market could impact Nvidia’s future growth sooner than expected. Hence, I remain cautious about Nvidia’s valuation.

I currently hold shares of both Palantir and Nvidia, but I’m not planning to increase my investment in either stock at their current prices.

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Adam Spatacco holds shares in both Nvidia and Palantir Technologies. The Motley Fool also has positions in and recommends Datadog, MongoDB, Nvidia, Palantir Technologies, ServiceNow, and Snowflake, following their disclosure policy.

The views expressed in this article are those of the author and do not necessarily represent the views of Nasdaq, Inc.