It’s been three decades since there’s been a next-big-thing investment trend that’s captivated the attention of professional and everyday investors quite like the artificial intelligence (AI) revolution. Just as the advent of the internet changed the course of corporate America 30 years ago, there’s a growing belief that AI can lead to that next leap in economic growth and innovation.
The wide-ranging potential for AI to transform virtually every sector and industry isn’t lost on Wall Street or its top-tier investors. When examined as a whole, billionaire investors have piled into AI stocks, with many of Wall Street’s most-successful billionaire money managers not wanting to miss the boat.
Following monumental gains, Super Micro Computer has found itself on the chopping block
One company that’s undeniably benefited from the sky-high expectations Wall Street has set for the AI revolution is server and storage solutions specialist Super Micro Computer (SMCI). Shares of Super Micro ended March 19 higher by 220% on a year-to-date basis, and 853% on a trailing-12-month basis, all thanks to artificial intelligence.
Whereas a lot of investors are focused on the gamut of generative AI solutions being offered by the “Magnificent Seven,” it’s the AI infrastructure companies — those providing the physical backbone that allow AI-accelerated data centers to do their thing — which have really thrived. Super Micro Computer provides the customizable rack servers businesses are using in their high-compute data centers.
Super Micro also has intricate ties to AI darling Nvidia (NVDA). The company’s high-end servers incorporate Nvidia’s H100 graphics processing units (GPUs), which have become nothing short of the standard in data centers geared at generative AI solutions.
But not everyone is on board with the idea that Super Micro Computer is going to be an outperformer. Based on Form 13F filings with the Securities and Exchange Commission for the December-ended quarter, three billionaire investors were active sellers of Super Micro stock, including:
- Steven Cohen of Point72 Asset Management: 255,383 shares sold
- Ken Griffin of Citadel Advisors: 144,833 shares sold
- Israel Englander of Millennium Management: 93,827 shares sold
While relying on Nvidia’s high-powered GPUs has given Super Micro Computer stock an undeniable associated boost, it also means the company is constrained by Nvidia’s supply shortage of its top chips.
Furthermore, Super Micro has a history of failing to meet lofty expectations. The company’s customizable servers were expected to be the hottest thing since sliced bread during the initial cloud boom. Unfortunately, demand failed to meet the lofty expectations set by Wall Street and investors. AI may represent another instance of a next-big-thing trend enduring a bubble prior to its maturation.
But while these three billionaires were dumping shares of Super Micro Computer, they were collectively piling into shares of six other AI stocks.
Steven Cohen adds time-tested, bubble-resistant AI stocks
Billionaire Steven Cohen and his investment team haven’t been shy about paring down their stakes in outperforming AI stocks. While positions in Nvidia and Super Micro were significantly reduced during the fourth quarter, Cohen and his aides added to two time-tested AI stocks:
- Amazon (AMZN): 462,179 shares purchased
- Dell Technologies (DELL): 670,677 shares purchased
Most people are familiar with Amazon because it operates the world’s most-dominant e-commerce marketplace. But the bread-and-butter operating segment that generates the lion’s share of Amazon’s cash flow and operating income is cloud infrastructure service platform Amazon Web Services (AWS).
Amazon is giving AWS customers access to a variety of generative AI solutions that can help them tailor their message to customers, as well as improve customer interactions. Given that enterprise cloud spending is still in its somewhat early stages, AWS has the potential to deliver sustained double-digit sales growth throughout the decade, if not well beyond.
Selling Super Micro Computer and purchasing shares of rival Dell Technologies is another interesting move. Dell has a highly profitable personal-computing segment to fall back on if AI-server demand were to taper. Though Super Micro offers the superior short-term growth rate, Dell appears to be a smarter investment for those who want AI server exposure without stomach-churning share price volatility.
Ken Griffin piles into the infrastructure backbones of the AI movement
A second billionaire money manager that wasn’t shy about kicking Super Micro Computer to curb during the December-ended quarter is Ken Griffin of Citadel Advisors. Despite dumping 56% of its stake in Super Micro, Citadel absolutely piled into the infrastructure backbones of the AI revolution:
- Nvidia: 1,579,153 shares purchased
- Advanced Micro Devices (AMD): 3,506,881 shares purchased
No company has more directly benefited from the rise of AI than Nvidia. According to analysts at Citigroup, Nvidia might account for 90% (or more) of the GPUs in use in AI-accelerated data centers this year. As long as demand continues to outpace the supply of its high-powered chips, Nvidia should have no trouble commanding a high price for its superior product.
At the same time, I’ve pointed out no shortage of reasons Nvidia could be the bubble of the century. Aside from history not being in its favor, the biggest concern for Nvidia might be that its top four customers, which account for 40% of its total sales, are developing AI-GPUs of their own. It’s pretty clear that these businesses want to lessen their reliance on Nvidia or replace this AI titan in their data centers altogether.
Griffin’s fund also gobbled up shares of Nvidia rival AMD. Last June, AMD unveiled its MI300X AI-GPU as a direct competitor to Nvidia’s H100. Though AMD began the rollout of this core AI product to a small group of customers last year, a sizable ramp in production and deliveries is expected this year.
Don’t forget that AMD has also been chiseling away central processing unit (CPU) market share from Intel. Though CPUs aren’t growing at anywhere close to the same rate as GPUs, AMD’s foundational CPU business could help insulate the company far more than Nvidia if the AI bubble were to pop.
Israel Englander opts for a couple Magnificent Seven components
The final big seller of Super Micro Computer stock during the fourth quarter was billionaire Israel Englander at Millennium Management. Englander and his team jettisoned 82% of their previous stake in Super Micro in favor of two Magnificent Seven constituents:
- Alphabet (GOOGL) (GOOG): 2,446,316 Class A shares (GOOGL) purchased
- Apple (AAPL): 2,174,695 shares purchased
Buying big into Wall Street’s most influential stocks represents a relatively safe way to take advantage of AI growth while protect yourself in the event that AI uptake fails to meet sky-high expectations.
Alphabet’s foundation continues to be its internet search engine Google. In February, Google was responsible for nearly 92% of worldwide internet search share. It’s practically a monopoly that isn’t going to be unseated anytime soon. This gives the company incredible ad-pricing power and generates abundant operating cash flow in most economic climates.
But Google Cloud might be Alphabet’s most-promising growth segment. This now-profitable platform has earned a 10% global share of cloud infrastructure spend. Allowing its customers access to generative AI within Google Cloud can open new revenue streams for Alphabet.
Meanwhile, Apple has been actively incorporating AI solutions in its physical products for years. A perfect example being the fine-tuning associated with autocorrect and predictive text for iPhones. Apple is very much reliant on AI advancement to fuel sales of its beloved physical products.
However, Apple’s biggest long-term growth driver is likely its shift to subscription services. Although it’s not abandoning the physical products that endeared users to its brand, Apple is complementing its revenue stream by becoming a platforms company. This move should be positive for its operating margin, as well as encourage users to stay within the umbrella of Apple’s product and service ecosystem.
— Sean Williams
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Source: The Motley Fool