Billionaires love this US tech stock (Hint: It's not Nvidia)

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

In a recent analysis of 16 hedge funds managed by household-name billionaires, four of the funds held lots of Advanced Micro Devices (NASDAQ: AMD) shares. What's more, the funds that ranked AMD among their ten largest holdings consistently placed the stock among the top four.

That's an interesting showing, since AMD isn't one of the commonly chosen "Magnificent Seven" stocks. Its $207 billion market cap barely ranks among the 50 largest stocks in today's market.

Have these billionaires figured out something special about AMD? Let's see what the semiconductor designer's business prospects look like in 2025.

Who owns a lot of AMD stock?

Here are the four hedge funds that ranked AMD among their largest holdings earlier this year:

Data source: Form 13F filings for each fund's Q4 2023.

It should be noted that these billionaires can't dictate AMD's strategy or future to any meaningful degree. Together, these found funds own about 2% of AMD's shares. Seen as a unified block of AMD owners, their 32.5 million stubs would qualify them as the sixth-largest institutional holder today. That's a long way behind Vanguard's and Blackrock's index funds, which hold 149 million and 130 million AMD shares, respectively.

But the index fund managers don't assess each stock in their enormous portfolios. They simply reflect the rankings and weightings of various stock market listings, which in turn usually try to paint a fair picture of the stock market from a certain perspective. As a member of at least 21 such indices, AMD is bound to attract large index-fund investments.

Hedge funds often push for changes in their most important holdings. However, none of the four AMD holders in the table above are in the habit of playing the activist investor card. With a market cap north of $200 billion, it gets expensive to build a large enough position to influence boardroom votes.

Why is AMD attracting attention from billionaires?

Above all else, AMD benefits from the ongoing market boom around generative artificial intelligence (AI).

The data centre segment, where you see revenues from the AI-training AMD Instinct line of chips, saw third-quarter revenues jump 122% year over year. Data centre products accounted for more than half of AMD's total sales in that report, up from 27% in the year-ago period.

AMD isn't all about AI and data center growth, since the PC-oriented client division also posted strong results. Revenues rose 29% in that segment amid robust demand for the Zen 5 line of Ryzen processors.

But yeah, it's fair to say that the billionaires above are betting on AMD's AI business. The Instinct chips may not outperform market leader Nvidia's (NASDAQ: NVDA) latest and greatest chips on an apples-to-apples basis, but they offer other benefits such as lower electric power consumption and more affordable prices per chip.

For example, the Lawrence Livermore National Laboratory built its latest supercomputer around AMD's Instinct MI3001 accelerators, creating the highest-performance system in the world. On the just-released Top 500 list of high-performance supercomputers, you'll find AMD Instinct chips in half of the top ten. Nvidia's H100, A100, and Grace Hopper chips only show up in three names on that list.

Supercomputers aren't the whole market for AI training systems, but AMD is clearly doing something right. You don't win these large system orders by pure luck.

AMD: A cheaper AI chip investment

So if you're looking for an alternative way to invest in the hardware side of that AI boom, you could do well by following the examples of Laffont, Griffin, Shaw, and Halvorsen. It's not the absolute cheapest AI hardware stock, since arch rival Intel (NASDAQ: INTC) is wrestling with management changes and a painful strategy shift.

But AMD's stock trades at 8.5 times trailing sales and 25 times forward earnings estimates. That's blissfully affordable next to Nvidia's multiples of 29 and 31, respectively. I can't guarantee that AMD will outperform Nvidia, the AI niche, or the market as a whole next year, but the billionaires made large bets on this stock for good reason. I'd rather start buying AMD stock today than add to my Nvidia holdings, and you should at least look into doing the same.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.