In the second quarter, Citadel, managed by one of the most successful hedge fund managers in history, Ken Griffin, significantly reduced its stake in Nvidia.
Ken Griffin, a billionaire and the founder and CEO of Citadel Advisors, oversees what is considered the most profitable hedge fund ever, based on net gains as reported by LCH Investments. Griffin is widely regarded as a highly successful money manager on Wall Street, which often leads investors to track his quarterly trades through Forms 13F.
During the second quarter, Citadel offloaded 9.2 million shares of Nvidia, reducing its position by 79%. Conversely, Griffin increased his investment in Super Micro Computer by purchasing 98,752 shares, marking a 96% increase in his position. Despite this shift, Citadel maintains a larger capital investment in Nvidia than in Super Micro, but these trades could indicate a change in investment sentiment.
Nvidia, known for its graphics processing units (GPUs) that accelerate data center workloads such as training large language models and running artificial intelligence applications, commands about 90% market share in AI chips. Analysts believe this dominance will continue for at least a couple more years. Developers prefer Nvidia’s GPUs for their speed and robust ecosystem of software development tools. Additionally, Nvidia provides adjacent data center hardware, including CPUs and network switches, and also offers software and cloud services that support AI application development, allowing the company to innovate across the entire data center computing stack.
When Citadel sold some of its Nvidia shares, the stock traded at an average valuation of 67 times earnings, peaking at 79 times. Following a more than doubled earnings report in the June quarter, Nvidia’s valuation multiple decreased to 64 times earnings, potentially making the shares more attractive. Analysts project Nvidia’s earnings will grow at 37% annually over the next three years, an upward revision from 34% during the second quarter, suggesting that Griffin might have increased Citadel’s position in Nvidia since then.
Regarding Super Micro Computer, the company manufactures servers, including complete server racks, designed for data center infrastructure. Supermicro’s internal engineering and modular product design allow it to rapidly introduce new technologies, bolstering its leadership in AI servers. Despite the likely increase in competition from companies like Dell Technologies, Supermicro’s expertise in direct liquid cooling (DLC) technology, which reduces data center power consumption by 40% compared to traditional air cooling, may sustain its leadership.
Supermicro reported mixed financial results in the fourth quarter of fiscal 2024, with revenue up 143% to $5.3 billion, but gross margin fell nearly 6 percentage points to 11.2%, impacting earnings growth. This decline may suggest reduced pricing power amid rising competition, although management expects gross margin to normalize by the end of fiscal 2025.
Ken Griffin’s acquisition of Supermicro stock in the second quarter may have been affected by allegations from Hindenburg Research in August, accusing the company of accounting manipulation. CEO Charles Liang has rebutted these claims as “false or inaccurate statements,” although Supermicro delayed filing its Form 10-K for fiscal 2024 and has not yet resolved the issue.
This situation recalls previous infractions from 2014 to 2017, for which Supermicro was fined $17.5 million in 2020. In September, The Wall Street Journal reported that the Justice Department was investigating similar allegations based on claims from a former employee. The investigation is in early stages, and details remain scarce, but investors should remain vigilant regarding the associated risks.
Looking forward, Statista forecasts AI server sales will grow by 30% annually through 2033, and Wall Street predicts Supermicro’s adjusted earnings will increase by 54% over the next 12 months. Although these projections make the current valuation of 22 times adjusted earnings appear attractive, the ongoing regulatory concerns might lead Ken Griffin to reduce Citadel’s position in Supermicro since the second quarter.
