Wall Street's Hottest Trend, Artificial Intelligence (AI), Has a Conviction Problem -- Just Ask Nvidia, Broadcom, and Advanced Micro Devices

Roughly 30 years ago, the internet changed corporate America's growth trajectory forever. Businesses' ability to reach beyond their storefronts with the click of a mouse has spurred growth in American businesses for decades.

However, Wall Street has been waiting quite some time for the next big trend to rival the internet. While a number of next-big-thing technologies, innovations, and trends have come along since the mid-1990s, none have come close to matching what the advent of the internet did for businesses...until now.

Image source: Getty Images.

The rise of artificial intelligence (AI) has professional and everyday investors excited -- and with good reason. The capacity for AI-driven software and systems to become more proficient at their assigned tasks and potentially even learn new skills without human intervention gives this technology utility in most sectors and industries around the globe.

Perhaps the most jaw-dropping estimate of AI's utility comes from "Sizing the Prize," a report issued by researchers at PwC. Based on a combination of increased productivity and consumption-side effects, PwC is forecasting a $15.7 trillion lift to the global economy by 2030 solely from the artificial intelligence revolution.

But while most Wall Street analysts and investors are overwhelmingly bullish on AI, conviction seems to be lacking where it matters most -- in the companies leading this game-changing revolution.

The sky is seemingly the limit for Nvidia, Broadcom, and AMD

A quick look at the stock charts for Wall Street's leading AI companies shows they're certainly not struggling. Nvidia (NASDAQ: NVDA) has gained more than $3 trillion in market cap since the start of 2023, while Broadcom (NASDAQ: AVGO) and Advanced Micro Devices (NASDAQ: AMD) have tacked on respective gains of 216% and 141% in 21 months and change. AI is undeniably fueling this outperformance.

Nvidia's hardware has led the charge. Its graphics processing units (GPUs) are effectively the brains powering split-second decision-making in AI-accelerated data centers. Demand for the H100 GPU (commonly known as the "Hopper") has been so overwhelming that Nvidia has been able to command anywhere from a 100% to 300% pricing premium for its chips, compared to its rivals. The end result is a double-digit percentage-point improvement in the company's adjusted gross margin.

Although Advanced Micro Devices entered the arena well after Nvidia, it's still finding plenty of demand for its less-costly MI300X AI GPUs. With Nvidia's chips backlogged, time-tested chip companies like AMD can be expected to siphon AI GPU orders away from the former.

A little over a week ago, AMD unveiled its next-gen AI GPU, the Instinct MI325X, which is set to go toe-to-toe with Nvidia's successor Blackwell GPU architecture. AMD intends to begin production of its newly unveiled chip later this year, which wouldn't give Blackwell much, if any, of a head start.

Meanwhile, Broadcom has been the preferred choice of businesses for its AI networking solutions. While Broadcom is known for much more than just its AI ties, including its wireless chips and accessories used in next-gen smartphones, the company's Jericho3-AI fabric has played a key role in reducing tail latency and maximizing the computing potential of AI GPUs in high-compute data centers. The bulk of Broadcom's current sales growth can be traced to its AI solutions.

Seemingly nothing suggests the arrow isn't pointing higher for all three companies...unless you dig into their respective insider transactions.

Image source: Getty Images.

Wall Street's leading artificial intelligence stocks have a conviction problem

Based on comments from Nvidia CEO Jensen Huang, Broadcom CEO Hock Tan, and AMD CEO Lisu Su, demand for AI solutions is robust, as their companies' respective double-digit growth rates would imply. Yet, the actions of these CEOs and other insiders point to a decisive conviction problem among Wall Street's leading AI companies.

Anytime an insider of a publicly traded company (this can be a board member or a high-ranking member of the executive team) purchases or sells shares of their company's stock, they're required to report these transactions via Form 4 to the Securities and Exchange Commission. Over the trailing-12-month period (Oct. 17, 2023, through Oct. 16, 2024), selling activity has been lopsided, to say the least, at all three of these leading businesses:

• Nvidia: 83 insider sales (25 from Jensen Huang) and 0 insider purchases
• Broadcom: 32 insider sales (eight from Hock Tan) and 0 insider purchases
• AMD: 23 insider sales (eight from Lisu Su) and 0 insider purchases

Collectively, this is 138 separate insider sales and not one open-market purchase from a single insider at any of these artificial intelligence juggernauts over the trailing year.

To be fair, there is a laundry list of reasons for insiders to sell stock, and they're not all necessarily bad news. For example, insiders might be selling stock to cover their tax bills. It's not uncommon for executives who receive a lot of share-based compensation to need to sell some of their stock to cover federal and/or state taxes.

On the other hand, there's only one reason company insiders buy stock: They believe it'll rise. It's been 13 months since the last insider buy at Broadcom, 46 months since the last insider purchase at Nvidia, and more than a half-decade since the last insider buy at AMD! Put simply, actions speak louder than words.

If insiders at Nvidia, Broadcom, and AMD lack the conviction to put their money where their mouth is, why should everyday investors pay a premium for a technology that has yet to prove itself?

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.