Wall Street has been waiting decades for the next game-changing innovation to rival what the internet did for corporate America in the mid-1990s. After a long wait, artificial intelligence (AI) looks to have answered the call.

The ability for AI-driven software and systems to become more proficient at their tasks over time, as well as learn new skills without human intervention, gives this technology almost limitless potential. According to Sizing the Prize, the analysts at PwC see AI adding $15.7 trillion to the global economy through various production improvements and consumption-side effects by 2030.

But while no company has benefited more directly from the rise of AI than semiconductor titan Nvidia (NVDA), quarterly Form 13F filings with the Securities and Exchange Commission show billionaire money managers are consistently choosing two other AI stocks over Wall Street’s darling.

More than a half-dozen billionaire investors have been sellers of Nvidia stock
Nvidia has been able to ride its first-mover advantages to a nearly $3.2 trillion increase in market cap since the start of 2023. To date, its AI-graphics processing units (GPUs) hold a veritable market share monopoly in high-compute data centers.

Despite this competitive edge, more than a half-dozen billionaires were decisive sellers of Nvidia stock during the June-ended quarter, including (total shares sold in parenthesis):

  • Jeff Yass of Susquehanna International (52,497,275 shares)
  • Ken Griffin of Citadel Advisors (9,282,018 shares)
  • David Tepper of Appaloosa (3,730,000 shares)
  • Stanley Druckenmiller of Duquesne Family Office (1,545,370 shares)
  • Cliff Asness of AQR Capital Management (1,360,215 shares)
  • Israel Englander of Millennium Management (676,24 shares)
  • Steven Cohen of Point72 Asset Management (409,042 shares)
  • Philippe Laffont of Coatue Management (96,963 shares)

Taking into account Nvidia’s historic climb of well over 800% in roughly 22 months, profit-taking likely accounts for some of this selling activity. But there may be more to this selling than meets the eye.

For example, U.S. regulators have been limiting Nvidia’s sales and profit potential over the last two years. Regulators have restricted exports of the company’s high-powered AI chips to China, which is one of Nvidia’s top-dollar markets.

Insider activity has been another sore spot for Nvidia. While there are plenty of reasons for high-ranking executives and board members to sell, some of which are benign, there’s only reason for insiders to purchase stock — they expect the share price to head higher. December will mark four years since the last open-market purchase from an Nvidia insider. Meanwhile, there have been 83 insider sales over the trailing-12-month period.

Nvidia can also expect competition to slowly chip away at its leading data-center market share. New entrants into the AI-GPU arena, coupled with Nvidia’s largest customers all internally developing AI chips of their own, would be expected to adversely impact Nvidia’s, thus far, otherworldly pricing power and margins.

Lastly, no market leader of a next-big-thing innovation has avoided a bubble-bursting event over the last 30 years. Investors have a terrible habit of overestimating the adoption of new technologies, and nothing suggests AI is going to be the exception.

Rather than hold shares of Nvidia, billionaire money managers have consistently chosen to buy the following two artificial intelligence stocks instead.

Super Micro Computer
The first AI stock that billionaires clearly preferred over Nvidia in the second quarter is customizable rack server and storage solutions specialist Super Micro Computer (SMCI). Based on the latest 13F filings, a half-dozen billionaire asset managers were buyers of Super Micro, including (total shares purchased in parenthesis and adjusted for the company’s 10-for-1 stock split at the end of September):

  • Israel Englander of Millennium Management (5,533,230 shares)
  • Jeff Yass of Susquehanna International (5,088,140 shares)
  • Ken Griffin of Citadel Advisors (987,520 shares)
  • Steven Cohen of Point72 Asset Management (450,660 shares)
  • Ray Dalio of Bridgewater Associates (157,770 shares)
  • Cliff Asness of AQR Capital Management (10,400 shares)

The logical reason for investors to buy into the Super Micro growth story is that businesses wanting first-mover advantages in the AI arena will need to rapidly expand their data-center infrastructure. Super Micro is the logical choice to make that happen, as evidenced by the 110% net sales growth the company delivered in fiscal 2024 (ended June 30), and the 87% sales growth, based on the midpoint of its guidance, expected for the current fiscal year.

What makes this somewhat of an odd selection for billionaires is that Super Micro Computer’s rack servers incorporate Nvidia’s H100 GPUs. On one hand, this acts as a dangling carrot that keeps its infrastructure in high demand. Conversely, it puts Super Micro at the mercy of its suppliers, including Nvidia, which is dealing with backlogged orders for its GPUs.

I’d be remiss if I didn’t also mention that noted short-seller Hindenburg Research released a report in late August alleging “accounting manipulation” at Super Micro. Despite the company denying these allegations, reports have surfaced that the U.S. Justice Department is conducting an early stage probe. To boot, Super Micro delayed filing its annual report, which is raising eyebrows on Wall Street — and not in a good way.

There’s no question that Super Micro Computer’s stock is historically cheap, based on forward-year earnings per share (EPS) estimates; but there are also some very big questions that need answers before this stock gets a clean bill of health.

Microsoft
A second artificial intelligence stock billionaires are consistently choosing over Nvidia is one of only three $3 trillion businesses, Microsoft (MSFT). During the June-ended quarter, eight prominent billionaire money managers purchased shares of Microsoft, including (total shares purchased in parenthesis):

  • Ken Fisher of Fisher Asset Management (1,340,392 shares)
  • Ole Andreas Halvorsen of Viking Global Investors (695,444 shares)
  • Ray Dalio of Bridgewater Associates (510,822 shares)
  • Israel Englander of Millennium Management (240,624 shares)
  • David Siegel and John Overdeck of Two Sigma Investments (177,726 shares)
  • Stephen Mandel of Lone Pine Capital (90,287 shares)
  • Philippe Laffont of Coatue Management (20,684 shares)

Whereas Nvidia and Super Micro Computer represent the backbone of the AI revolution, Microsoft is viewed as a beneficiary based on the utility of the AI solutions it’s incorporating into its services. For example, Microsoft incorporated AI into its search engine (Bing) and web browser (Edge) with the assistance of OpenAI, the company behind the ultra-popular chatbot, ChatGPT. Microsoft happens to be a notable investor in OpenAI.

Additionally, Microsoft plans to lean on AI solutions within its rapidly growing cloud infrastructure service platform, Azure. Giving its enterprise clients the ability to build and train large language models, as well as run generative Ai solutions, should help Azure sustain double-digit sales growth and, at worst, maintain its position as the global No. 2 cloud infrastructure service platform.

Beyond AI, billionaire asset managers are likely impressed with Microsoft’s cash flow machine. Although legacy segments like Office and Windows aren’t the growth stories they once were, their impressive market share and juicy margins continue to deliver.

The exorbitant amount of cash generated from Microsoft’s operations affords the company the ability to take risks. Microsoft is no stranger to making big acquisitions, and ended fiscal 2024 (June 30) with more than $75 billion in cash, cash equivalents, and short-term investments.

If the AI bubble were to burst, Microsoft would have the sales channels and cash in place to weather the storm much better than Nvidia.

— Sean Williams

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Source: The Motley Fool