Nvidia and Microsoft: Why This Top Investment Firm Decided to Dump Shares

The AI trend has been the theme behind the current bull market, driven mostly by Big Tech. However, in certain corners, some of the biggest names appear to be losing their luster.

London-based investment firm Findlay Park, which managed $10.7 billion in assets by the end of Q3 and whose sole fund, the American Fund, outperformed 86% of its peers, has been slashing its holdings of Nvidia (NASDAQ:NVDA) and Microsoft (NASDAQ:MSFT).

Findlay Park CEO Simon Pryke acknowledges the outsized growth that has propelled the ‘Magnificent Seven’ stocks to extraordinary heights. However, he points out that “earnings growth expectations are pretty tepid and valuations are still pricing in as if that growth pattern’s going to continue.”

“One of those numbers is wrong,” Pryke went on to further add, and that makes these high-flying stocks unappealing to Findlay Park right now.

But does the Street agree with these bold moves? We turned to the TipRanks database to gauge the sentiment around these two market heavyweights. Here’s what we discovered.

Nvidia

It’s quite a statement to bid farewell to the stock that has been this bull market’s poster boy but that’s exactly what Findlay Park has done. The fund exited its position in Nvidia during Q3, selling its 3,065,280 shares. That’s a big change of heart as the stock had comprised 5% of the fund’s total holdings earlier this year.

It’s a bit of an understatement to say Nvidia has been a key beneficiary of the AI boom as its success in the field has turned it into one of the world’s most valuable companies. While once its GPUs were primarily aimed at the gaming sector, over the past few years, its data center segment has turned into a monster business. That is down to one simple reason; no one has yet to make better AI chips than Nvidia. Such is its dominance that it has practically cornered the market for itself.

The growth has been on display in a series of highly impressive earnings reports, and that trend continued with the latest quarterly readout. In the fiscal third quarter, the semiconductor giant posted year-over-year revenue growth of 93.6%, reaching a record $35.08 billion and exceeding analyst expectations by $1.95 billion. The Data Center segment, home to its AI chips, contributed $30.8 billion, marking a 112% increase from the previous year. At the other end of the spectrum, adjusted EPS hit $0.81, beating the consensus estimate by $0.06. For the upcoming January quarter (FQ4), the company forecasts revenue of $37.5 billion (with a 2% margin of error), surpassing Wall Street’s projection of $37.1 billion.

With all that growth underway, is Findlay’s move a bit of a head-scratcher? Not entirely, according to D.A. Davidson analyst Gil Luria. While Luria holds an optimistic view of Nvidia’s short-term prospects, he takes a skeptical stance when looking further ahead.

“NVIDIA is well within its means to extend growth into next year given hyperscaler commentary around additional investments in AI compute and the company’s ability to deliver even with production setbacks,” the 5-star analyst said. “Despite demand in the near-term continuing to be strong, we still believe a decline in demand for NVIDIA compute is inevitable as customers begin to scrutinize their ROI on AI compute.”

To this end, Luria rates NVDA shares as Neutral while his $135 price target implies the stock is fully valued at current levels. (To watch Luria’s track record, click here)

That said, most of the Street is in disagreement with that view and still sees Nvidia as a winner. The stock claims a Strong Buy consensus rating, based on a mix of 37 Buys vs. 3 Holds. At $176.14, the average price target factors in one-year returns of 27%. (See NVDA stock forecast)

Microsoft

Talk of AI and Microsoft must get a mention. The tech giant has been pouring billions into building out its AI infrastructure, particularly through its partnership with OpenAI, the maker of ChatGPT. From integrating AI tools like Copilot into Office products to expanding Azure’s AI capabilities, the company is positioning itself as a leader in the AI revolution.

However, all this ambition comes at a price; capacity constraints and questions about whether the rapid investment can deliver the expected returns have soured sentiment somewhat recently. While its AI initiatives are exciting, investors are wondering if the growth will truly keep pace with the spending.

That was sort of the main story when the company reported fiscal first-quarter earnings (September quarter). The results exceeded expectations but along with increased spend, the outlook failed to impress.

Revenue grew by 16.1% y/y to reach $65.59 billion, beating the forecast by $1.03 billion and EPS of $3.30 outpaced analyst expectations by $0.19. However, CapEx reached $14.92 billion, slightly surpassing Wall Street’s estimate of $14.74 billion and marking a big increase from the $9.9 billion spent in the same quarter last year.

Microsoft also tempered its revenue expectations for the Azure cloud service in FQ2, forecasting growth of 31% to 32% (in constant currency). This represents a decline from the 34% growth reported in the first quarter, signaling a slowdown in one of its key business segments.

Findlay Park is obviously getting a bit jittery here. During Q3, the company offloaded 540,100 MSFT shares, amounting to more than 40% of its position.

We’ll turn again to D.A. Davidson’s Gil Luria, who applauds Microsoft’s positioning in AI but offers a cautious take on what’s coming next.

“While growing AI revenue to $10bn in such a short timeframe is an impressive feat, we do not believe investors have had a chance to wrap their head around the staggering levels of investment that have led to this revenue,” Luria said. “We believe Microsoft will generate a loss on AI its revenue this year on a total investment of $81bn, thus generating a negative ROI. More importantly, at the current rate of investment, we believe the ROI will remain subpar even if the revenue from AI reaches $50bn at full margins within 5 years.”

Quantifying his stance, Luria recommends a Neutral rating on MSFT along with a $425 price target, suggesting the shares have no room left to run right now.

Once again, Findlay Park and Luria’s views are at odds with the general consensus on Wall Street. Based on a lopsided 26 Buys versus 3 Holds, the analyst consensus rates MSFT shares as a Strong Buy. The forecast anticipates 12-month returns of 15%, considering the average price target stands at $496.92. (See MSFT stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.