Why Is Billionaire Ken Griffin Dumping This AI Stock?Why did billionaire Ken Griffin, one of the sharpest investors of our time, slash his stake in AI giant Broadcom—and what hidden opportunity could he be chasing instead?
Ken Griffin, the legendary founder of Citadel, has built his reputation on making bold yet calculated moves in the market. In recent years, Griffin has made headlines with his billion-dollar bets on artificial intelligence stocks. Yet, his latest move—selling over 64% of his stake in Broadcom (AVGO)—has left investors wondering: why would he dump a stock so deeply embedded in the AI revolution? The answer may lie in the intersection of valuation, opportunity, and Griffin's evolving perspective on where the AI landscape is heading. Broadcom Is A Key Player in the AI EcosystemBroadcom has long been considered a gatekeeper in the world of AI infrastructure. The company produces a range of technologies critical to powering AI applications, from networking chips to custom silicon solutions for data centers. Its dominance has made it a vital supplier for the companies building the digital backbone of the AI economy. In its fiscal third quarter of 2024, Broadcom posted stellar results, with revenue growing 47% year-over-year to $13.1 billion. The company’s adjusted earnings per share rose 18%, and management raised their full-year revenue forecast to $51.5 billion, representing an impressive 44% growth. These results have pushed Broadcom’s stock up 51% this year. Wall Street has taken note, with a $193 per share consensus price target on the stock. So why, then, did Ken Griffin decide to sell over 3 million shares of Broadcom during the third quarter? The answer lies in a combination of valuation concerns and a broader reassessment of where the most promising opportunities in AI may lie. What Ken Griffin Likely Spotted in BroadcomGriffin’s decision to sell Broadcom wasn’t due to a lack of confidence in the company’s technological capabilities. Instead, it may have been driven by valuation concerns and the competitive dynamics of the AI sector. Broadcom’s valuation, while not as lofty as some of its peers, has become a sticking point for some investors. The stock trades at a price-to-earnings ratio of around 140x, which is significantly higher than historical averages for semiconductor companies. While Broadcom’s growth rates are strong, they may not justify its current valuation compared to newer, faster-growing AI players. Another factor Griffin may have considered is Broadcom’s burgeoning debt load. The company’s long-term debt sits at $66.7 billion which is about 8x more than NVIDIA’s equivalent figure. Broadcom’s operating income provides another clue. Despite strong revenue growth, operating income declined by 2% quarter-over-quarter. Coupled with net income turning negative for the quarter, it’s clear that Broadcom’s financial performance is facing pressures, likely due to acquisition-related costs and increased amortization expenses. Griffin’s Pivot to Nvidia Is A Telling MoveWhile Griffin was trimming his Broadcom position, he was aggressively adding to Citadel’s stake in Nvidia, another AI juggernaut. Nvidia’s dominance in the graphics processing unit (GPU) market—critical for training and running AI models—has made it the poster child of the AI revolution. In its most recent quarter, Nvidia posted 93.6% year-over-year revenue growth and net income has climbed to $19.3 billion. Griffin increased Citadel’s Nvidia holdings by over 7 million shares during the third quarter, a jump of more than 5x, bringing the total stake to just shy of $900 million. Nvidia’s rapid growth, combined with its critical role in the AI ecosystem, likely made it a more compelling opportunity in Griffin’s eyes. The Opportunity for Retail InvestorsFor retail investors, Broadcom remains an appealing play in the AI infrastructure space, even if Griffin sees greater opportunity elsewhere. Broadcom has several factors working in its favor, including a growing subscription revenue base. In fiscal Q3, subscription and services revenue reached $5.63 billion, up 187% year-over-year, and now accounts for 43% of total revenue. This shift toward recurring revenue provides greater stability and predictability for investors. The VMware acquisition, while adding to Broadcom’s debt burden, has the potential to unlock significant value. VMware’s multi-cloud services complement Broadcom’s infrastructure software segment, opening up new opportunities in cloud computing and enterprise IT solutions. The successful integration of VMware could make Broadcom a more diversified and resilient company in the long run. Risks and Challenges AheadDespite these strengths, Broadcom faces significant risks. Its debt-to-equity ratio has surged following the VMware acquisition, raising questions about financial flexibility, particularly in a high-interest-rate environment. Additionally, the competitive landscape in AI is intensifying. While Broadcom plays a critical role in the AI supply chain, it lacks the dominance in GPUs that Nvidia enjoys or the innovation edge seen in some of its competitors. Broadcom’s slower revenue growth in its semiconductor segment, which accounts for the bulk of its business, is another area of concern. While AI-driven demand has provided a boost, broader market trends in semiconductors could temper future growth. Final ThoughtsKen Griffin’s decision to pivot away from Broadcom doesn’t diminish the company’s importance in the AI ecosystem. Instead, it reflects his preference for Nvidia’s higher growth potential and leadership in the GPU market. For retail investors, Broadcom represents a different kind of opportunity—one grounded in infrastructure, recurring revenue, and a more moderate valuation. Whether you follow Griffin’s lead or stay the course with Broadcom, the AI revolution offers plenty of room for both approaches to thrive. You're currently a free subscriber to Alpha Insider - How Billionaires & Hedge Funds Are Investing. For the full experience, upgrade your subscription.
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