Should You Follow Billionaire David Tepper and Dump Your Stake in Nvidia Stock?

David Tepper is a billionaire known for owning the NFL's Carolina Panthers team and co-founding the hedge fund Appaloosa Management.

Each quarter, intuitional investors managing more than $100 million are required to file a form 13F. These filings reveal which stocks "smart money" portfolio managers bought and sold during the most recent quarter.

According to Appaloosa's latest 13F, the firm dumped 84% of its stake in semiconductor stock Nvidia (NASDAQ: NVDA) in the second quarter. Normally, investors are left speculating over what may have influenced heavy buying or selling activity in a specific stock.

However, during a recent interview on CNBC, Tepper didn't hold back. He actually explained the reasoning for the sale of Nvidia stock, and candidly, I'm completely aligned.

Let's dig into what Tepper said, and explore some specific risk factors surrounding Nvidia right now.

A wise man knows he knows nothing

In the interview, Tepper expresses his thoughts on Nvidia's trajectory. While he admits that near-term growth looks optimistic thanks to the company's upcoming Blackwell GPU launch, Tepper goes on to say that he has "no idea" what the company could look like beyond 2025.

"We sold a lot of our Nvidia, but the stock we thought was too high at the time," Tepper told CNBC. "Those stocks like Nvidia ... (are) a question -- do you have enough power for the growth, do you have the next generation models that can take their chip? I just don't know how you know."

What specific challenges does Nvidia face?

The bulk of Nvidia's growth right now stems from its compute and networking business. More specifically, the company's chipsets -- known as graphics processing units (GPUs) -- are used for a number of generative artificial intelligence (AI) applications. While players including Intel and Advanced Micro Devices also develop chips, Nvidia's GPUs are widely regarded as the industry standard.

Many of the technology world's largest enterprises, including Microsoft, Tesla, Amazon, Meta Platforms, and Alphabet, are thought to be some of Nvidia's largest customers.

While this looks like fantastic news on the surface, there is more to the story. Each of the "Magnificent Seven" members above are investing heavily in their AI infrastructure, and that includes developing chips in-house.

As more GPUs flood the market and compete with Nvidia more directly, it's likely that the company's pricing power will weaken. In turn, Nvidia's entire operation could begin decelerating -- from sales, to profit margins, to cash flow.

Image source: Getty Images.

Should you dump your shares of Nvidia stock, too?

It's natural that rising competition could put a dent in Nvidia's growth. Where things get tricky is trying to quantify just how much Nvidia's revenue and earnings power could be impacted. It's these fluctuations and unknowns surrounding Nvidia's financial forecast that appear to be influencing Tepper's trading activity.

Here's another way to think about it: Ask yourself if Nvidia stock will be higher several years from now compared to where it is today. Considering competition from its own customer base is on the horizon, it's hard to buy into a narrative in which Nvidia's operation becomes materially larger over the next few years or even the next decade. Bearing that in mind, how much longer will it be appropriate for Nvidia stock to continue trading at a premium over its peers?

While I suspect Nvidia will remain a core engine powering the broader AI movement, I think there is a real case to be made that the stock's best days are behind it.

With all of this said, I wouldn't encourage panic selling a position in Nvidia. Rather, if you think the company's growth prospects look compromised or uncompelling, you may want to take some profits while keeping some exposure to Nvidia, just as Tepper did.

Should you invest $1,000 in Nvidia right now?

Before you buy stock in Nvidia, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $782,682!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of October 7, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Spatacco has positions in Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends Intel and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.