Key insights
- AI chip stocks, including Nvidia, Broadcom, and AMD, have recently experienced a dip following Broadcom's lower-than-expected AI chip sales forecast. Despite this short-term pullback, the article suggests that the long-term demand for AI chips remains strong due to the increasing application of AI in real-world problems and the essential role of these chips in AI development and operation. This presents a potential buying opportunity for investors, echoing a long-term investment philosophy.
Artificial intelligence (AI) stocks have led the S&P 500's gains throughout this bull market. And chip designers, key players in the AI story, have been among the biggest winners. These companies, such as Nvidia (NVDA 0.40%), Broadcom (AVGO 0.08%), and Advanced Micro Devices, power tasks that are crucial for the development of AI and have been among the first to generate significant revenue gains from their AI businesses.
But, in recent days, these stocks have stumbled, with Broadcom leading the way after its AI chip sales forecast disappointed investors. In the first five trading days of June, Broadcom lost 13%, while Nvidia and AMD slid 2.8% and 9.6%, respectively, as investors backed away -- at least temporarily -- from these leading AI companies.
Now, the question is: Should you buy AI chip stocks on the dip? Words from Nvidia chief Jensen Huang offer an answer that's crystal clear -- and this answer also echoes wisdom from billionaire investor Warren Buffett. Let's check it out.
So, first, a quick note on the AI story so far and the message from Broadcom that pushed AI chip stocks lower. As mentioned, AI chip designers have been among the first AI companies to monetize their investments -- and this is because AI chips are at the heart of any AI program. Customers can't avoid using these products, and that's translated into billions of dollars in revenue for the leading chip companies.
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Demand has continued to soar, as companies, including chip designers and cloud players, have said quarter after quarter. And now, as we turn to the moment when AI is more and more frequently applied to real-world problems, this trend should continue -- AI agents, or the software that carries out tasks, require chips to operate.
Broadcom, however, disappointed some investors when it forecasted AI semiconductor revenue of $16 billion in the upcoming quarter, missing analysts' expectations for more than $17 billion, and full-year AI chip revenue of $56 billion, lower than the estimate of more than $57 billion.
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It's important to keep in mind that the company's forecasted figures still represent tremendous growth -- for example, the full-year figure would equal a 180% increase year over year. But investors have gotten used to AI chip companies beating even the loftiest expectations -- so when they don't, their share performance may come under pressure. And when a big player like Broadcom delivers results that miss expectations, others in the industry generally face the selling pressure too.
Now, let's consider the words Nvidia's Jensen Huang pronounced regarding whether you should buy AI chip stocks on the recent dip.
"Everybody should be very excited," Huang told reporters this week in South Korea, according to Reuters. "They can now buy stock at a cheaper price, and it's absolutely true that the future of AI is very bright." (Huang, while there, announced deals with major partners, including a multi-year deal for memory supply with SK Hynix.)
What does all of this have to do with Warren Buffett? The billionaire, who led Berkshire Hathaway to six decades of market-beating performance, has always stood by the principle of investing in quality stocks when they're down.
"Only those who will be sellers of equities in the near future should be happy at seeing stocks rise," Buffett wrote in a 1997 letter to shareholders. "Prospective purchasers should much prefer sinking prices."
Buffett, who retired from the CEO post at Berkshire early this year but remains involved as chairman, has never been a big investor in tech stocks. But his advice may apply to any sector as long as investors are considering quality companies.
As a result of the recent decline, Broadcom's valuation looks much more reasonable than it did a few weeks ago -- and Nvidia's looks dirt cheap. They are trading at 33x and 22x forward earnings estimates, respectively.
And with AI moving into the stage of real-world use and expanding across industries, it's very likely that significant growth may continue for quite some time. That makes now an excellent time for growth investors to follow the wisdom of Warren Buffett -- and the recent words of Jensen Huang -- and buy AI chip stocks on the dip.