Billionaire Stanley Druckenmiller Made a Huge Mistake With Nvidia

Stanley Druckenmiller has shown he's a firm believer in the future of artificial intelligence (AI), as he's invested in several companies leading in this industry. Certain AI companies remain in his portfolio -- like Amazon -- but he's recently exited others.

He sold two of 2024's biggest AI winners, Nvidia (NASDAQ: NVDA) and Palantir Technologies. He closed out his position in the former in the third quarter of last year and sold all of the latter in the first quarter of this year.

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Investors don't know the exact reason for the Palantir cut, though it's reasonable to guess valuation may have had something to do with it. The stock trades for 237x forward earnings estimates today, prompting some to say it's gotten too expensive and may be set for declines. Druckenmiller clearly cares about this element because he's said Nvidia's high valuation pushed him toward the exit door.

Even though Nvidia's valuation has indeed climbed, this billionaire said selling Nvidia was a mistake. "I'm licking my wounds from a bad sale," he told Bloomberg in an interview last year, and suggested he would consider buying the stock again at the right price.

Druckenmiller hasn't done that yet -- but it's something to watch for in coming quarters as Nvidia's valuation has come down quite a bit over the past several months. Meanwhile, this top investor just made a huge move on another AI stock that has a close relationship with Nvidia. Here's a closer look.

Image source: Getty Images.

Druckenmiller's investing track record

First, it's worth keeping your eye on Druckenmiller's moves as he has a strong track record of successful stock picking. This dates back to his 30 years of delivering a 30% average annual return -- and never posting a money-losing year -- as head of Duquesne Capital Management. Now he's leading the Duquesne family office and oversees $3 billion, and his moves could offer investors some inspiration when they go shopping for stocks.

What sort of big AI move did Druckenmiller make in the first quarter? He increased his holding of Taiwan Semiconductor Manufacturing (NYSE: TSM) by 457% to 598,780 shares.

TSMC is the company that brings some of today's most sought-after products to life: AI chips. Nvidia and Advanced Micro Devices, two AI chip giants, design their chips but don't manufacture them. They and many other companies turn to TSMC for this.

When demand for these chips is high, it not only benefits Nvidia and other chip designers, but also benefits TSMC. You can see that in the company's revenue and profit, which have steadily climbed in recent years.

TSM Revenue (Annual) data by YCharts.

In the first quarter, TSMC said revenue advanced 35% to more than $25 billion, and profitability on sales has been strong, too, with gross margin in the high 50% range.

You might wonder: What's the advantage of investing in TSMC over one particularly strong chip leader? By investing in TSMC, you don't have to bet on one particular chip designer dominating throughout the AI boom. Instead, you can benefit from the successes of all of these players, since TSMC is producing their chips.

An increase in U.S. manufacturing investment

TSMC also could see additional gains ahead as it's dramatically increased its investment in U.S. manufacturing, putting it right at the doorstep of major customers. Earlier this year, the company said it would boost its investment in chip manufacturing by $100 billion. This will fund three new fabs, two advanced packaging sites, and a research and development space. With this move, the company's total U.S. investment will reach $165 billion.

Meanwhile, TSMC has been trading at a bargain price since the start of the year, with the stock at less than 25x forward earnings estimates.

Considering all of these points, it's not surprising that Druckenmiller significantly lifted his position in the stock. This buy might be seen as a bet on Nvidia, too, as strong demand for the company's chips will likely lead to higher revenue for TSMC as the manufacturer of those chips. With this purchase, Druckenmiller may be setting himself up for a Nvidia-driven win once again.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Nvidia, Palantir Technologies, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.