1 Billionaire’s Bullish View on AI Means Investors Should Buy the Chip Dip

AI Semiconductor shares are down significantly from July highs. But is the drop an opportunity or is there a deflating AI bubble?

AI skeptics abound about the technology’s ultimate utility or whether strong spending can continue if there is a slowdown in the economy.

However, the one place you won’t find evidence of an AI slowdown is in earnings calls and comments from technology executives. This week, Oracle (ORCL 0.83%) founder and chairman Larry Ellison has offered an incredibly bullish outlook on AI spending this decade, which should allay any fears for long-term tech investors.

Why Are AI Semiconductor Stocks Falling?

It might be shocking to some as people like Nvidia (NVDA 8.15%), Broadcom (AVGO 6.79%)and Advanced microdevices (AMD 4.92%) have fallen so much over the summer that these stocks are now 25% to 41% below their July highs.

There could be several reasons behind the declines, despite the fact that each company is currently experiencing strong growth related to artificial intelligence.

First, these stocks have had quite a run since the semiconductor stock lows at the end of 2022, each posting big gains over the past 18 months or so. Some investors are probably nervous about these big gains increasing concentration in their portfolios and may have been looking for any excuse to take profits or rebalance their portfolios.

In addition, recession fears came to the fore after a weak jobs report in July, even as the Federal Reserve chose to keep interest rates high that month. While the August jobs figure showed a sequential increase in job additions, the August numbers were also below expectations. So some investors may be getting nervous about the economy.

Although they have outdated long-term growth prospects, semiconductor stocks are traditionally known to be cyclical. This could again encourage older investors nearing retirement or short-term traders who cannot afford large short-term declines to take profits.

Finally, some investors are skeptical that the huge earnings from Nvidia and others are unsustainable. While virtually all Magnificent Seven stocks have said they will continue to spend next year, some analysts are concerned that near-term revenue growth and profits may not match all that spending. If AI spending doesn’t materially increase the growth of these big tech stocks, these CEOs may find all that AI infrastructure spending hard to justify.

“An Ongoing Battle for Technical Supremacy”

On Monday night, cloud and database giant Oracle released its first fiscal quarter, with both results and guidance impressing investors, sending the stock up double digits the following day.

With the topic of the day being AI, management was asked on a conference call with analysts if the huge spending to train AI models was a bubble that dragged down chip demand. One skeptical analyst said that once the models were trained, most of the expense would be over.

President Larry Ellison refuted this claim quite easily with an interesting metaphor:

A lot of people think, oh my gosh, I send a kid to college and then I’m done. Training is over. I prepared for four years, then I can put the child to work and they will make inferences. And that is not true. This race goes on forever, to build a better and better neural network.”

Ellison pointed out that investment in AI should continue to grow for at least five, and possibly 10 years. This is for a few reasons. First, there are a handful of companies that can make the biggest frontier models. These companies have plenty of cash and cannot afford to cede the market to someone else. Ellison called it an “ongoing battle for technical supremacy” that will be fought by a handful of companies and “perhaps a nation state” over the next decade.

Image source: Getty Images.

Ellison noted that the entry price for a frontier model was probably $100 billion. If we look at the capital spending plans for Mag 7 stock, even their increased spending plans for the year don’t add up to that. For example, Meta platforms (META 1.40%)which builds its own Llama frontier models, just increased its capital spending, mostly on data center infrastructure for AI, to $37 billion to $40 billion by 2024. Microsoft (MSFT 2.13%)which has invested in and has an exclusive cloud arrangement with OpenAI, spent $19 billion on capital expenditures last quarter, including finance leases, but also noted that only about half was on data center infrastructure.

In addition to just the large frontier models, Ellison pointed out that there will be plenty of smaller but specialized models in each area. He gave the example of the medical industry, where millions of CAT scans, biopsies or blood samples could be processed by industry-specific AI models to detect cancer. These models will be built in addition to the large general models. The same goes for sovereign nations that want their own AI.

Not sold separately

Ellison, meanwhile, emphasized that AI is not a separate thing that is sold to customers, but will be built into current Oracle products, such as database management or automated record retrieval in Oracle’s Cerner software for hospitals.

It’s not something you sell separately. It is the diagnostic system. It is the electronic medical record system. The pharmacy system, this prescription system, the user authentication, the authentication system, it’s all AI. And I know people think it’s a separate thing: “Oh my God.” And I hear a lot of app companies saying, “Oh, now we have AI agents. We will charge for this separately.” I mean, our apps will be primarily AI apps, everything. How to charge separately for all?

And this comes to a key point. While nervous investors may have highlighted a lack of AI-specific growth, tech companies need to invest in AI to keep their existing products competitive. As such, there is a high risk to present and future income if they do not invest. And that should keep AI spending high for years.

“Huge” and “immense” demand.

CEO Safra Catz added that Oracle is seeing “enormous” and “immense” demand for Oracle’s cloud infrastructure for AI processing. That’s in line with what other tech companies are saying this earnings season.

And yet, AI-related chip stocks have seen a significant pullback even despite these comments. But this leads me to believe that the current decline in AI stocks is simply a pullback that precedes higher gains and not an impending crash or longer decline.

As such, now is a great time to load up on your favorite long-term AI chip stocks. In the coming years, growth should continue and should rebound.