To build on this point, competition from within can be even more dangerous. All four of Nvidia’s top customers by net sales are developing AI-GPUs for use in their data centers. Nvidia’s hardware maintaining computing advantages may not be enough when compared to the cost advantages of internally developed chips. This suggests Nvidia could lose out on precious data center real estate down the road.

Ken Griffin and his team at Citadel may also be taking their cues from Nvidia’s management team. While CEO Jensen Huang has been incredibly optimistic about his company’s future and the successor Blackwell chip, it’s coming up on four years since the last time any company insider purchased shares of their stock on the open market. A barrage of insider selling paints a picture that implies Nvidia’s stock has gotten ahead of itself.

Lastly, Griffin may be letting history act as a guide. In spite of the buzz surrounding the rise of AI, no game-changing innovation or technology has avoided an early stage bubble in 30 years. Professional and retail investors consistently overestimate the adoption and utility of new technologies, which eventually leads to disappointment and a bubble-bursting event. Since no stock has benefited more than Nvidia from the AI revolution, it would, presumably, be hit the hardest if the AI bubble bursts.

But while billionaire Ken Griffin was meaningfully cutting back his fund’s stake in Nvidia, he was buying into another AI company, with well-defined competitive advantages, hand over fist.

The high-flying artificial intelligence stock that caught the attention of Citadel’s brightest investors, including Griffin, is none other than cloud-based data-mining specialist Palantir Technologies (NYSE: PLTR). Citadel’s hedge fund increased its stake in the company by roughly 1,140% during the second quarter.

The best answer to “why Palantir?” is because it’s irreplaceable at scale.

Palantir’s two core operating segments are Gotham and Foundry. Gotham is an AI-driven platform that helps government entities collect data and plan various missions. This includes the autonomous tasking of satellites and drones.

Meanwhile, Foundry is Palantir’s AI and machine learning-inspired platform that’s geared toward businesses. It’s tasked with making sense of large sums of data and helps businesses streamline their operations. While there are companies that handle bits and pieces of what Gotham and/or Foundry bring to the table, nothing else is close to the scale of Palantir. Wall Street tends to reward uniqueness, irreplaceability, and sustainable moats.

Much of Palantir’s growth has been fueled by Gotham. Many of the contracts Palantir secures from government agencies last multiple years, leading to highly predictable operating cash flow. But Gotham’s long-term growth potential is also reasonably limited given that Palantir will only allow the U.S. and its allies access.

Palantir’s future is very much reliant on the success of Foundry. Although it’s still very early in its expansion, the company’s commercial segment appears to be finding its footing. Enterprise customer count jumped 55% to 467 from the prior-year period, as of June 30, with sales from this segment climbing 33%. Considering the addressable market for Foundry has no glass ceiling like Gotham, it has the potential to become a considerably larger profit driver in the latter-half of this decade.

The one notable drawback with Palantir is its valuation. While Citadel got in well ahead of its recent run-up, it’s a tough task trying to validate Palantir’s forward price-to-earnings (P/E) ratio of 100! Though it looks to have all the tools and intangibles needed for success over the long run, Palantir’s stock may find the short-term sledding difficult.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.

Billionaire Ken Griffin Sold 79% of Citadel’s Stake in Nvidia and Is Piling Into Another Artificial Intelligence (AI) Stock With a Competitive Moat was originally published by The Motley Fool