Wall Street has fallen in love with the artificial intelligence (AI) trend. This is not surprising, considering that PwC analysts expect AI to add nearly $15.7 trillion to the global economy annually by the end of 2030.
Semiconductor giant Nvidia's (NVDA 1.41%) shares have gained nearly 430% in the past three years. While the AI trend is still going strong, many analysts now view Nvidia's shares as being priced for perfection. Challenges such as increasing competition, reduced pricing power, geopolitical and regulatory risks, and over-reliance on a few customers may negatively impact the company's share price in the coming months.
Billionaire investors such as George Soros of Soros Fund Management, Stanley Druckenmiller of Duquesne Family Office, Lee Ainslie of Maverick Capital, and David Tepper of Appaloosa Management sold shares of Nvidia in the second quarter, according to their 13F filings with the Securities and Exchange Commission. At the same time, many billionaire investors have been putting money into more reasonably priced AI stocks such as Super Micro Computer (SMCI 8.24%) and Microsoft (MSFT 3.97%).
Those two billionaire picks could be smart buys for retail investors, too.
Super Micro Computer
Super Micro Computer, also known as Supermicro, is a leading provider of server and storage solutions for data centers. Its shares are up by nearly 1,110% over the past three years, even after the stock fell by almost 64% from its 52-week high in March -- a slide mainly triggered by weak investor sentiment toward growth stocks. The company has delayed filing its 10K for its fiscal 2024, which did not go over well with investors, and an unfavorable report from short-seller Hindenburg Research also took a toll on the stock.
NASDAQ: SMCI
Key Data Points
Despite this, increasing demand for AI-optimized infrastructure from data centers, enterprise customers, consumer internet companies, and governments remains a major growth catalyst. Bank of America expects the AI server market to grow at a 50% compound average rate over the next three years, and expects Supermicro's share of the AI server market to grow from 10% in 2023 to 17% in 2026.
Supermicro's servers stand out from other mass-produced servers because they are easily customizable to their owners' changing requirements, energy efficient, and effective in thermal management. Goldman Sachs has projected that data center power demand will rise by nearly 160% from 2022 to 2030. With data centers estimated to account for a whopping 3% to 4% of global power consumption by 2030, demand for Supermicro's AI-optimized servers integrated with liquid cooling technology should continue to rise.
Supermicro also benefits from its close ties with major chip manufacturers like Nvidia, Advanced Micro Devices, and Intel. These relationships give it early access to advanced chip technologies, which it then embeds in its server solutions. Supermicro thus offers its clients early access to the newest advanced technologies.
Analysts now expect Supermicro's revenues to grow by 88.3% year over year to $28.14 billion and adjusted earnings per share (EPS) to rise by 52.3% year over year to $33.65 in its fiscal 2025 (which will end in June 2025). Although analysts' estimates for fiscal 2026 have been muted, that's not surprising considering the high base they will be growing from. In fiscal 2026, Supermicro's revenues and adjusted EPS are expected to grow by 10.8% and 30.2%, respectively.
Supermicro is trading at about 23 times earnings, far lower than its historical three-year average of 30.4 times. Considering the company's focus on energy-efficient computing, its close relationships with chip manufacturers, and its reasonable valuation, Super Micro is a smart pick now.
Microsoft
Technology behemoth Microsoft was also a favorite buy among billionaire investors in the second quarter. While the stock did not soar even after the company reported a double beat in its fiscal 2024 fourth quarter (which ended June 30), it is still up by around 14.7% so far in 2024.
NASDAQ: MSFT
Key Data Points
Investors were concerned about the slower-than-expected growth of the Azure cloud computing business last quarter, which was mainly attributed to the constrained capacity of AI services. However, this will most likely prove to be a short-term headwind. With demand for Azure AI services going strong, Microsoft expects increased capital expenditures in AI capacity will reaccelerate Azure's growth by the second half of fiscal 2025.
Azure AI enables enterprises to build custom AI applications by giving them access to prebuilt models, advanced security features, collaboration tools, and other supporting infrastructure. These services are rapidly gaining popularity, as is evident from the 60,000-strong customer base of Azure AI at the end of the fiscal fourth quarter, up 60% on a year-over-year basis. Azure also remains a preferred choice for enterprises handling multicloud and hybrid workloads. This is apparent considering that Azure accounted for a 20% share of global cloud infrastructure services in the second quarter of 2024.
Microsoft has also embedded OpenAI's generative AI capabilities to build its AI-powered Copilot agent, which it has integrated across many of its products and services. Since it became generally available, more than 77,000 organizations have adopted Copilot. Copilot for its Microsoft 365 productivity suite saw a 60% quarter-over-quarter increase in customer count in fiscal Q4. Furthermore, the increasing adoption of Copilot has played a pivotal role in doubling the number of large enterprise customers with more than 10,000 seats for Microsoft 365 on a quarter-over-quarter basis.
Besides cloud computing, business productivity, and AI, Microsoft also has a solid presence in cybersecurity, gaming, and professional networking. The company posted impressive financial results in fiscal 2024, with revenues and earnings jumping 16% and 20%, respectively. That's why it makes sense for retail investors to piggyback on billionaire investors' enthusiasm and purchase at least a small stake in this diversified technology giant.
