Why Did Ray Dalio Sell NVIDIA Stock?

With a personal net worth estimated at $14 billion, Ray Dalio of Bridgewater Associates is among the most prominent hedge fund leaders on Wall Street. That’s why it may interest many investors to learn that Dalio offloaded about 27.5% of his NVIDIA stake in Q3, reducing his position by 1.8 million shares.

Why is Dalio selling NVIDIA, and should other investors think about following suit?

First, a Look at Dalio’s Investing Strategy

Ray Dalio is known for having an intricate investment strategy based on understanding and profiting from the cycles of the economy.

Generally, he uses uncorrelated assets to protect his portfolio from potential shocks. As a result, Bridgewater Associates tends to have a rather large and diversified portfolio.

Indeed, the largest of the fund’s holdings at the moment is an S&P 500 ETF. This approach puts him in stark contrast to investors like Warren Buffett and Bill Ackman who favor extremely concentrated portfolios composed of undervalued businesses with long-term competitive edges.

Another habit of Dalio’s that stands out is his resistance to the more traditionally rigid buy-and-hold approach favored by many successful investors. While Dalio certainly believes in owning high-quality businesses for long periods of time, he’s also more than willing to engage in profit-taking.

Once a stock ceases to be undervalued, Dalio is usually willing to take some of his chips off the table and reinvest the profits in other, more attractively-priced assets.

Where Does NVIDIA Fit In?

One of the first things that jumps out about NVIDIA with regard to Ray Dalio’s investing methods is the fact that the stock has skyrocketed since the time he initially bought it. This opens up a very strong possibility that Dalio sold part of his fund’s stake in the company in order to take some of the profit he has managed to rack up.

Dalio’s average purchase price for NVDA shares is estimated to be about $62.40 per share, adjusted for the 10-for-1 stock split that occurred earlier this year. He’s believed to have sold for a 90% profit with an average sale price in or around $118.30 per share.

This view is also somewhat reinforced by the fact that NVIDIA looks quite overvalued at its current price. The company, despite having a market cap of nearly $3.5 trillion, is still priced at multiples that assume extremely high forward growth rates.

NVDA trades at 49x forward earnings, 114x cash flow and 31x sales. Even the company’s incredible growth potential may not justify these ratios. NVIDIA’s price-to-earnings-growth ratio is 1.4, placing it above the 1.0 that’s usually taken to signify fair value.

Where NVIDIA’s valuation is concerned, Ray Dalio may actually have gotten out in front of the trend. Coming off of a Q3 earnings report that was nothing short of extraordinary, the market sold off NVIDIA. This happened despite the fact that the company beat analyst consensus estimates handily.

As such, it may be reasonable to conclude that NVIDIA had become overvalued due to sheer market hype and that even the best possible results may not be able to match investor expectations.

In addition to the argument for profit-taking, Dalio may have sold NVIDIA due to his views about the relationship between macroeconomics and stock returns.

How Dalio Thinks About Selling

The noted investor has publicly stated that he holds gold to hedge against inflation and national debt risks. With the national debt quickly rising and little chance of a significant turnaround on the way, Dalio may be expecting a period of higher inflation and, by extension, higher interest rates ahead.

Such an environment would weigh on growth stocks and could make high-flying companies like NVIDIA less attractive.

A case could be made that Dalio’s sale of NVIDIA reflected his views on changes in the company’s competitive advantages.

Increasingly, large tech companies are developing their own AI chips in-house to reduce their reliance on NVIDIA’s hardware. Smaller competitors are also doing everything they can to seize market share, though NVIDIA certainly remains dominant for the moment.

It’s worth noting that a bit less bullishness on NVIDIA doesn’t seem to have changed Ray Dalio’s mind on AI in general. In fact, Q3 saw Bridgewater Associates dramatically increase its stake in Broadcom, a leading AI networking company.

Taking this into account, the final answer is likely that Dalio saw NVIDIA as a somewhat expensive stock with some growing competitive pressures and potential economic headwinds and decided to take profit while pursuing more attractive AI opportunities elsewhere.

Does This Mean That NVIDIA Is a Sell Now?

Needless to say, the broader market is still highly optimistic about NVIDIA’s future. Though the selloff after Q3’s earnings release dropped indicated just how much hype was baked into the price, it wasn’t especially dramatic. The company is still at the cutting edge of a market that doesn’t appear likely to slow down anytime soon.

Coming off of Q3, NVDA shares also got a series of analyst upgrades. The current average 12-month target price for the stock is just shy of $175 per share and would represent an upside of more than 23% from the latest close of $141.95 per share.

Encouragingly, the lowest target is $135 per share, suggesting that NVIDIA could still have much more upside potential than downside risk. As the company goes from strength to strength, the fundamentals may gradually justify even its seemingly high valuation.

Ultimately, NVIDIA still looks like a company with plenty of potential and a great market position. Even Ray Dalio likely still believes this, given the fact that Bridgewater Associates continues to hold well over 4.7 million shares of the company valued at about $675 million.

At this point, Dalio’s decision to sell some of his NVIDIA stake looks like sensible portfolio rebalancing with a bit of profit-taking, but he doesn’t appear to have turned bearish on NVIDIA. As such, retail investors may prefer to continue holding NVIDIA shares despite their high price tag. Assuming the company can keep posting the kind of exceptional performance it has recently, there could still be a long runway left in front of NVIDIA shares.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.