Does Billionaire Ken Griffin Know Something Wall Street Doesn't? The Citadel Chief Sold More than 80% of His Broadcom Stock and Is Piling Into Another Artificial Intelligence (AI) Stock-Split Stock Instead

One of the richest people in the world, Ken Griffin, has an estimated net worth of over $50 billion, according to Forbes, and that's due to his career in finance. The Harvard grad founded Citadel in 1990 and has grown the company into one of the largest hedge funds in the world and a significant market maker.

While the firm owns thousands of stocks, investors are always curious to see what the "smart money" on Wall Street is up to. In the second quarter of the year, Citadel dumped most of its stake in the custom chipmaker Broadcom (NASDAQ: AVGO) and loaded up on another popular artificial intelligence (AI) stock instead.

Selling Broadcom after it surged into Mag Seven territory

The "Magnificent Seven" have become household stocks due to their massive technology businesses, market caps exceeding $1 trillion, and because investors expect them to be the big winners from the artificial intelligence boom. Broadcom was not included in the Magnificent Seven but has recently emerged as a comparable company. Its stock price has increased roughly 91% in the past year and now has a market cap of roughly $1.63 trillion.

Image source: Nvidia.

Broadcom makes custom chips for AI workloads that hyperscalers like OpenAI, Alphabet, and Meta Platforms have taken a keen interest in. While Nvidia (NASDAQ: NVDA) is the main pick-and-shovel play for AI, making graphics processing units that can handle multiple tasks at once, Broadcom focuses on application-specific integrated circuits (ASICs) that make one particular task more efficient. For instance, Meta used the chips it designed with Broadcom specifically for its AI models focused on generating ads and organic content.

Wall Street analysts are still bullish on Broadcom and the custom AI chip business. Mizuho analyst Vijay Rakesh recently reiterated an outperform rating on the stock and issued a price target of $410, implying 21% upside from current levels. Rakesh called Broadcom the "King of AI Custom Silicon" and sees ASIC revenue accelerating and the company drawing broader interest in the AI space.

In the second quarter, Citadel sold roughly 82% of its long position in Broadcom. Several reasons could explain the sale. The company trades at 50 times forward earnings. Broadcom also still has a fairly small list of customers in its custom chip business. While those few customers can potentially generate tens of billions in revenue for the company over time, it could be problematic if AI infrastructure spending dries up. It's also quite possible that Citadel is simply taking gains after a good run.

Piling into the AI king

While Citadel was selling the custom chipmaker, the fund piled into the AI chip king Nvidia. In the second quarter, Citadel more than quadrupled its position in Nvidia and now holds a long position of over 8 million shares.

Now, I will caution investors from following the smart money blindly. Citadel runs a "pod shop," meaning it allocates capital to small teams of portfolio managers, who then have broad autonomy to invest as long as they follow certain guidelines from Citadel. This means Griffin isn't making all of the firm's investment decisions, although he does have broad influence over the firm and likely dictates who the firm hires. Hedge funds also tend to focus on 12-18 month time horizons, so they may be trying to trade a stock instead of thinking long term.

Nvidia has had a volatile year, dealing with the trade war between the U.S. and China, which is a key market where Nvidia has previously done business. Nvidia and CEO Jensen Huang have also had to work closely with the Trump administration after the administration told Nvidia that it would require export licenses to sell certain chips in certain countries like China.

Over the last six months, Nvidia's stock has bounced back over 90%. While Nvidia's relationship with the Trump administration and China is still fluid, if geopolitical tensions were to ease and China's market opened, Nvidia could generate billions in additional revenue as soon as its current quarter.

But the big question investors are grappling with has to do with AI demand and spend, and whether or not the industry needs to catch its breath. Nvidia alone has been investing a ton in other AI stocks -- notably many of its customers -- and the company recently announced a $100 billion investment in OpenAI. The bears find this rather odd and suggest that Nvidia is circulating money to prop up a sector, while the bulls say that people are underestimating just how much demand there will be for AI.

Obviously, if you are a believer in AI and the continuation of AI infrastructure spend, the decision to invest in Nvidia is easy. Now trading at over 41 times forward earnings, the stock looks more expensive, especially with a market cap near $4.7 trillion. But it's difficult to say what will unwind the AI thematic trade in the near term. Considering Citadel bought the stock months ago, the fund has done well on the investment.

I do think Nvidia will be relevant for decades to come and that AI is here to stay, but the exact path may be hard to predict, so I would recommend bullish investors use dollar-cost averaging when buying the stock.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.