How long will building powerful artificial intelligence last? With Nvidia, the leader in AI chips, the market looks optimistic (NASDAQ:NVDA) Challenger Advanced Micro Devices trades at 34 times forward earnings estimates (NASDAQ: AMD) Trade at 30x.
But there is considerable debate among investors about whether this rapid growth is sustainable or whether the rise in AI will explode like the dot-com bust.
This week, the CEOs of AI chip leaders Nvidia and AMD made announcements that further highlighted the bull market for their respective stocks and AI chip stocks as a whole.
Bulls vs. Bears in AI
After a year and a half of strong performance, AI stocks fell sharply as skepticism grew over the summer. After the Magnificent Seven, a major buyer of AI chips, reported strong but not explosive earnings in July, investors are wondering what these big chip buyers need to invest in Nvidia chips. It seems that they are concerned that they are not seeing any profits. As a result, most major tech stocks and stocks related to AI chips fell.
Giant hedge fund Elliott Management has been more skeptical, with particularly bearish comments about what it perceives to be an AI “bubble.” In his latest letter to investors, Elliott wrote that AI stocks are overvalued, saying that AI applications are “never cost-effective, don’t actually work properly, and use a lot of energy.” Either we consume it, or it turns out we don’t.” I can’t trust it. ” Elliott dismissed the technology as only useful for a few uses, such as summarizing reports and assisting with computer coding.
That’s certainly a perspective to consider. This may also apply to current models currently on sale. But almost everyone in the tech industry believes in its benefits. If there were no benefits to be found, it seems unlikely that all major technology companies would significantly increase their investments in AI as they do now.
Oracle Chairman Larry Ellison dismissed these concerns, declaring that the race for AI supremacy will “continue forever to build better neural networks.” Ellison believes that the power of AI will improve with more computing and better models, and that big tech companies cannot afford to cede control of AI to their competitors. He doesn’t expect this buildup to end for another five to 10 years, because big tech companies have so much cash.
Jensen Huang and Lisa Su dropped the mic
This week saw two big announcements from the No. 1 and No. 2 AI chip companies that should allay short-term concerns about the sustainability of AI trading. Earlier this month, Nvidia CEO Jensen Huang said demand for the company’s next-generation Blackwell chip was “insane.” Back last week, Morgan Stanley analysts revealed that Blackwell was already sold out over the next 12 months after the company welcomed an Nvidia executive to its office.
the story continues
And on Thursday, AMD held its “Advancing AI” event, announcing its new EPYC 9005 CPU and Instinct MI325X GPU. During the presentation, CEO Lisa Su raised the market size forecast for AI accelerators. Su surprised investors last year when he predicted that the AI accelerator market would grow from $45 billion in 2023 to a whopping $400 billion in 2027.
So has this past year made her more skeptical or anxious about all her spending, as Elliott suspects?
In fact, the opposite is true. During the conference, Su raised the forecast that the AI accelerator market will reach a staggering $500 billion by 2028, saying, “Since (last year), AI demand has continued to grow and exceed expectations. It’s clear that it’s on the rise.” It continues to grow everywhere, driven by more powerful models, new use cases, and indeed broader adoption of AI use cases. ”
If Su and Huang’s prediction holds true, more companies than just Nvidia and AMD will benefit. Companies with strong competitive positions in the associated foundry, semi-cap equipment, server, or AI-integrated software industries should also benefit from this medium-term demand. Additionally, power and transmission providers should also see significant growth, as AI data centers consume large amounts of energy.
Bubble brewing? Not yet
Remember, the dot-com bubble burst in 2000, but it was preceded by a five-year “boom.” This boom coincided with the period following the Fed’s interest rate cuts from 1995 to 1998. Looking at where we are today, the AI boom is only about two years old, and the Fed just started its rate cutting cycle in September as well.
To this investor, we seem more like the mid-’90s than the precipice of a gigantic bubble burst. This boom could last longer than the Internet boom, as the MagSeven companies investing in AI are all very strong financially, much stronger than many emerging technology companies. In the mid-1990s. Furthermore, despite all this success, Mag Seven isn’t actually trading at the outlandish valuations that big tech companies were seeing in the late 1990s.
That doesn’t mean AI augmentation won’t be a bubble, it could be. However, it seems still too early, and absent an exogenous shock from the outside, AI stocks are too reasonable for a significant decline.
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Billy Duberstein and/or his clients have no position in any stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Oracle. The Motley Fool has a disclosure policy.
The article Nvidia and Advanced Micro Devices have great news for AI chip investors was originally published by The Motley Fool
