Billionaire Israel Englander founded Millennium Management in 1989. The firm has since become the second most successful hedge fund in history (behind Ken Griffin’s Citadel) in terms of net gains since inception, according to LCH Investments. That makes Englander a good source of inspiration for individual investors.
In the second quarter, Englander sold 7.7 million shares of Palantir Technologies(NYSE: PLTR), reducing his position by 59%. He simultaneously purchased 553,323 shares of Super Micro Computer(NASDAQ: SMCI), increasing his stake by 807%. Both stocks have more than doubled since January 2023, though Englander evidently had more conviction in Super Micro during the June quarter.
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Here’s what investors should know.
Palantir specializes in big data analytics. Its primary software products, Foundry and Gotham, let businesses collect data, develop machine learning (ML) models, and surface insights through analytical applications. Its adjacent artificial intelligence (AI) platform, AIP, brings support for large language models (LLMs) and generative AI to its core software.
In August, Forrester Research recognized Palantir as a leader in artificial intelligence and machine learning platforms, calling AIP “one of the strongest offerings in the AI/ML space.” In September, Dresner Advisory Services listed Palantir as a top-ranked vendor in a market study on artificial intelligence, data science, and machine learning software.
Palantir announced excellent financial results in Q3, exceeding Wall Street’s expectations on the top and bottom lines. Revenue increased 30% to $726 million, the fifth straight sequential acceleration, and non-GAAP earnings jumped 43% to $0.10 per diluted share. On the earnings call, CFO Dave Glazer attributed the strong performance to “unprecedented demand” for AIP.
Looking ahead, the International Data Corp. (IDC) estimates spending on AI platforms will increase at 41% annually through 2028. That will undoubtedly be a tailwind for Palantir, but a strong presence in a quickly growing market does not necessarily mean Palantir is a good stock to buy. Investors seem to be ignoring the company’s unsustainable valuation.
Wall Street expects Palantir’s adjusted earnings to increase at 27% annually through 2025. That makes the current valuation of 168 times adjusted earnings look absurdly expensive. Indeed, Wall Street has set the stock with a median 12-month target price of $38 per share. That implies 36% downside from its current share price of $59. Investors should steer clear of this stock right now.
Super Micro Computer builds servers, including full server racks equipped with storage and networking that provide turnkey solutions for data center infrastructure. The company often beats competing equipment manufacturers to market when suppliers like Nvidia and AMD launch new chips due to internal engineering expertise and a unique modular approach to product development.
That advantage has helped Super Micro secure a dominant position in AI servers, a market forecast to grow at 30% annually over the next decade. The company has also positioned itself as an early leader in direct liquid cooling technology, a more efficient alternative to traditional air cooling. Analysts anticipate explosive demand for liquid-cooled servers as power-hungry AI infrastructure becomes more prevalent.
However, Super Micro has run into potentially serious problems. In August, short seller Hindenburg Research accused the company of accounting manipulation. CEO Charles Liang dismissed the allegations, but Super Micro delayed filing its Form 10-K for fiscal 2024 and has yet to correct the problem. Importantly, the company was accused of similar wrongdoing several years ago and was ultimately fined $17.5 million in 2020.
In September, The Wall Street Journal reported the Justice Department was investigating Super Micro based on accusations made by a former employee. Details are scant, but the accusations seem to echo those made by Hindenburg. The situation continued to deteriorate in October when the company’s auditor Ernst & Young resigned, saying it was “unwilling to be associated with the financial statements prepared by management.”
To be fair, it is possible that Super Micro has done nothing wrong. The accusations could be false, and the auditor may have resigned due to the complexity of the situation. But investors simply do not have enough information to make an educated decision, so the stock is best avoided (or sold) right now. Indeed, I wouldn’t be surprised if Israel Englander had sold his entire position in Super Micro since the end of Q2.
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Trevor Jennewine has positions in Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
