Ken Griffin appears to know what he is doing. He is the founder of the wildly successful Citadel hedge fund which now boasts more than $27 billion in assets under management (AUM). And add to this his personal fortune of $8.6 billion- making him the richest person in the state of Illinois. So it is not surprising that his portfolio moves are carefully tracked by investors worldwide. In the most recent quarter he drew attention with his investment in two volatile chip giants Advanced Micro Devices, Inc. (NASDAQ:AMD) and NVIDIA Corporation (NASDAQ:NVDA).
Born in Florida, this fund legend made an early start in investing while still at Harvard University. Indeed, by the second year of his economics degree he had already started a $265,000 hedge fund focused on convertible bond arbitrage. He apparently installed a satellite link to his dorm to acquire real-time market data. The success of this fund enabled him to start a second fund relatively quickly. He founded Citadel in 1990. He is now one of the world’s most influential voices on the world of finance, a famous philanthropist and a well-known expert in the matter of financial deregulation.
Griffin recently gave a cautious interview to CNBC where he said that the ‘market rally is in the ‘seventh inning,’ and valuations are beginning to look ‘stretched’. However, at the same time he believes the bull rally will last for a while longer. In particular, he sees economic forces at work that can continue to underpin valuations for the time being including low inflation, low interest rates and solid sales growth.
Bearing this in mind let’s now take a closer look at these two intriguing chip trades:
Advanced Micro Devices
Griffin turned bullish on AMD in Q3. He initiated a new position in the stock with the purchase of 3,855,167 AMD shares valued at 49.153 million.
And no doubt this is a move that top Canaccord Genuity analyst Matt Ramsay would approve of. He recently reiterated his buy rating on the stock with a very bullish $20 price target- which suggests huge upside potential from the current share price of 84%. Ramsay has just enjoyed meeting management meeting while on his Silicon Valley bus tour. “The meeting was upbeat on the long-term outlook and roadmap, while several near-term product and financial concerns were discussed directly” says Ramsay.
He draws attention to six key focal points: 1) Ramsay anticipates AMD’s new 7nm products to compete with the 10nm roadmap from Intel in the PC market during 2018 and in servers during 2019. 2) While Ryzen desktop has underwhelmed slightly so far, Q4/17 Ryzen sales should ramp strongly for holiday sales. 3) Ramsay believes Ryzen Mobile should drive strong 2018 notebook sales growth following conversations with all 5 top OEMs (original equipment manufacturers). 4) It is likely that AMD will face a material decline in cryptocurrency revenue during 2018. Nonetheless Ramsay remains “confident in our total CG sales estimates supported by new Navi GPU launches and strong full-year of Ryzen PC and Ryzen Mobile sales.” 5) He sees an inflection for the EPYC server as taking place during the 2nd quarter of 2018. And looking out even further, he believes AMD’s roadmap can make over $1B in high-margin server sales annually in the next few years. 6) AMD’s gross margin progression remains on track toward the 40-44% target.
Overall, Ramsay concludes that he is reiterating his positive thesis on AMD. The “risk/reward is still tilted toward the upside and our long-term bullish target of $1.25+ in EPS remains exceedable by 2020.” Note that five-star Ramsay is one of the top 100 analysts ranked by TipRanks due to his impressive track record. However, on AMD stock specifically he has a more mixed performance with a 41% success rate and 29.9% average return across 17 ratings.
The Street has more cautious Hold consensus rating on AMD. In the last three months, analysts have published 8 buy ratings, 9 hold ratings and even 4 sell ratings on the stock. Meanwhile the average analyst price target of $14.68 (36% upside potential).
Griffin also made sure that chip giant Nvidia didn’t get left behind. He picked up another 133,661 Nvidia shares- giving the fund a total holding in the stock of 303,577 shares. Following this 79% boost, the fund now has a $54.271 million position in Nvidia.
On November 27, top RBC Capital analyst Mitch Steves reiterated his bullish sentiment on Nvidia stock. He is confident that the continued rise in crypto-currencies such as Ethereum is good news for Nvidia. Indeed, as long as prices of crypto-currencies are rising, Nvidia’s GPU will continue to experience the benefit says Steves. First, the “payback period” for crypto-currencies has dropped “materially” with the price increases. Take Ethereum for example which now has a payback of 5.6 months as opposed to the previous 9.4 months. The increasing speed of the paybacks “may lead to continued strength in GPU sales” for mining according to Steves.
At the same time, institutional investors could now move to take advantage of the crypto-currency explosion: “The “cat is out of the bag” so to speak and we wouldn’t be surprised to see more and more institutional money and high net worth individuals invest in the rapidly growing space (now a $300B+ market on a fully diluted basis).” Steves concludes that “Overall, the technology is progressing at a rapid rate combined with more institutional interest which is likely driving the prices up.” For example, the lightening network for Bitcoin is making progress while the Metropolis update for Ethereum should also boost confidence says Steves.
Analysts in general are cautiously optimistic on Nvidia, which has a Moderate Buy analyst consensus rating. This breaks down into 13 buy, 11 hold and 1 sell rating over the last three months. The average price target of these analysts of $215.18 translates into upside of 8% from the current share price.