Nvidia(NASDAQ: NVDA) and Chipotle Mexican Grill(NYSE: CMG) are brilliant companies. The former is a critical supplier in the artificial intelligence economy, and the latter has built enviable brand authority in the restaurant business. In turn, they have been such rewarding investments of late that both companies conducted stock splits in June to reset their soaring share prices.
However, the billionaire hedge fund managers below still sold shares of Nvidia in the second quarter while buying shares of Chipotle.
Cliff Asness of AQR Capital Management sold 1.3 million shares of Nvidia and purchased 673,292 shares of Chipotle.
Israel Englander of Millennium Management sold 672,242 shares of Nvidia and added 3.5 million shares of Chipotle.
Steven Cohen of Point72 Asset Management sold 409,042 shares of Nvidia and purchased 1.4 million shares of Chipotle.
Steven Schonfeld of Schonfeld Strategic Advisors sold 370,349 shares of Nvidia and added 131,715 shares of Chipotle.
Investors should not interpret those trades to mean Nvidia is a bad investment. All four fund managers still have some level of exposure to the semiconductor company, and the exposure is significant in some cases. For instance, Nvidia is still the largest position in AQR's portfolio.
Nevertheless, the trades are worth consideration. Here's what investors should know about Nvidia and Chipotle.
1. Nvidia
Nvidia is the foundation of the artificial intelligence (AI) boom. Its graphics processing units (GPUs) are the industry standard in accelerated computing, which pairs specialized hardware and software to speed up data center workloads, like AI training and inference. Nvidia has 80% market share in AI accelerators. That utter dominance reflects not only the superior performance of its GPUs but also the unparalleled breadth of its software development tools.
Vivek Arya at Bank of America recently raised his 12-month price target to $190 per share. The rationale behind the revision is that Nvidia will still have a 75% market share in AI accelerators by the end of the decade, such that data center revenue increases at 20% annually in the interim. That seems plausible, given that Nvidia is gaining share in adjacent data center hardware verticals, especially AI networking equipment.
Nvidia reported strong financial results in the second quarter of fiscal 2025 (ended July 2024), beating estimates on the top and bottom lines. Revenue increased 122% to $30 billion due to particularly strong momentum in the data center segment, driven by demand for AI hardware. Meanwhile, non-GAAP (generally accepted accounting principles) earnings soared 152% to $0.68 per diluted share.
Investors have good reason to think that momentum will continue. Nvidia has a big catalyst on the horizon with the launch of its next-generation GPU, Blackwell. The production ramp will begin in the fourth quarter, and demand is already so strong that the processors are booked out for 12 months. That means customers who place orders today will not receive Blackwell GPUs until late 2025.
Importantly, the hedge fund managers mentioned earlier were selling Nvidia in the second quarter. During that period, the stock traded at an average valuation of 66.4 times earnings, and earnings were projected to increase 34% annually over the next three years. But the stock is more attractive today. The stock currently trades at 64.7 times earnings, and analysts expect earnings to increase by 38% annually over the next three years.
Building on that, the present earnings multiple divided by the three-year earnings forecast gives a price/earnings-to-growth ratio (PEG ratio) of 1.7, a significant discount to the three-year average of 3.1. Long-term investors should consider buying a few shares here, though I would keep the purchase relatively small. The valuation is reasonable, but it's not cheap.
2. Chipotle Mexican Grill
Chipotle operates more than 3,500 fast-casual restaurants in North America and Europe. The company has built brand authority and consumer loyalty by focusing on "food with integrity." It sources only responsibly raised meats, never treated with hormones or antibiotics, and uses only fresh ingredients, meaning no preservatives, freezers, or can openers involved. As a result, Chipotle consistently ranks above average in same-store sales and customer traffic.
Chipotle has been laser-focused on improving throughput. It regularly retrains workers on fundamentals to ensure ingredients are stocked, food is prepared, and stores are properly staffed. Additionally, following the pandemic, the company launched new labor management and coaching tools and added technologies that automate certain workflows. Those efforts get customers through the line more quickly, which tends to improve satisfaction and loyalty.
Chipotle reported solid financial results in the second quarter. Revenue rose 18% to $3 billion on strong same-store sales driven by increased customer traffic and larger checks. Non-GAAP net income jumped 36% to $0.34 per diluted share. Former CEO Brian Niccol said, "Our focus and training around throughput paid off as we were able to meet the strong demand trends with terrific service and speed."
Importantly, the hedge fund managers mentioned earlier were buying Chipotle in the second quarter. At the time, shares traded at an average valuation of 65.9 times earnings, and earnings were forecasted to grow by 21% annually over the next three years. But the stock looks more attractive today. Shares currently trade at 58.2 times earnings, and earnings are projected to increase by 22% annually over the next three years.
That said, Chipotle stock is still expensive. The present earnings multiple divided by the three-year earnings forecast gives a PEG ratio of 2.6, a premium to the three-year average of 2.4. Prospective investors should wait for a pullback (maybe 10%) before buying shares.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Bank of America, Chipotle Mexican Grill, and Nvidia. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
