AI worries have climbed but demand is off the charts, says Bernstein's Rasgon

Key Concepts:

• Semiconductor sector sustainability
• AI revenue growth and targets
• Broadcom's AI customer and CEO retention
• Nvidia's Open AI investment
• Oracle's RPO (Remaining Performance Obligation)
• Financing costs for AI infrastructure
• Energy bottlenecks and power consumption
• Electrical capacity and infrastructure development

Main Topics and Key Points:

• Sustainability of Semiconductor Growth: The primary concern is whether the rapid growth in the semiconductor sector, particularly for companies like Broadcom and Nvidia, is sustainable. The analyst believes that recent developments suggest it can be sustained for longer than initially anticipated.
• Broadcom's AI Revenue: Broadcom reported a new major AI customer and CEO Hock Tan has agreed to stay until 2030 with retention incentives tied to achieving significant AI revenue targets, potentially reaching $120 billion.
• Nvidia's Open AI Investment: Nvidia's investment in Open AI initially caused some concern, but the first tranche of the investment isn't until next year, indicating a long-term commitment from Open AI to purchase Nvidia's products.
• Oracle's RPO: Oracle's Remaining Performance Obligation (RPO) number, which is in the hundreds of billions of dollars, suggests strong future demand for AI infrastructure.
• Financing and Energy Bottlenecks: The ability of companies to finance their AI infrastructure investments and potential energy bottlenecks are key considerations. Currently, the companies making these investments are large, profitable, and well-funded.
• Power Consumption: The increasing power consumption of AI infrastructure is a concern. Electrical capacity in the US hasn't grown significantly in the last 20 years, but customers are securing power years in advance of building data centers.

Important Examples, Case Studies, or Real-World Applications Discussed:

• Broadcom: The discussion of Broadcom's new major AI customer and Hock Tan's retention incentives tied to AI revenue targets serves as a case study for the company's commitment to and potential growth in the AI sector.
• Nvidia: Nvidia's investment in Open AI is presented as an example of a strategic move to secure long-term demand for its products.
• Open AI: Open AI's spending and targets are used to illustrate the scale of the AI infrastructure market.
• Oracle: Oracle's RPO number is cited as evidence of strong future demand for AI infrastructure.

Key Arguments or Perspectives Presented:

• Sustainability of Growth: The analyst argues that the growth in the semiconductor sector, particularly for companies like Broadcom and Nvidia, is sustainable for the foreseeable future, despite concerns about the rapid pace of growth.
• Power Consumption as a Bottleneck: The analyst acknowledges that power consumption is a potential bottleneck but notes that customers are taking steps to secure power in advance.

Notable Quotes or Significant Statements:

• "The worry that people would have on all these is that the music stops."
• "It's becoming increasingly clear, I think, that the party is still going, at least for now."
• "I've said for a long time, at some point there will probably be an air pocket or something. I mean, it has to be, but but it's not now."
• "They've basically said like, we're going to do this come hell or high water."

Technical Terms, Concepts, or Specialized Vocabulary:

• Semiconductor Sector: The industry involved in the design and manufacturing of semiconductors, which are essential components in electronic devices.
• AI (Artificial Intelligence): The simulation of human intelligence processes by computer systems.
• RPO (Remaining Performance Obligation): A metric used in subscription-based businesses to represent the total value of future revenue that is contracted but not yet recognized.

Logical Connections Between Different Sections and Ideas:

The discussion begins with the overall concern about the sustainability of growth in the semiconductor sector. It then delves into specific examples of companies like Broadcom and Nvidia to illustrate why the analyst believes the growth is sustainable. The discussion then shifts to potential bottlenecks, such as financing and energy consumption, and how companies are addressing these challenges.

Data, Research Findings, or Statistics Mentioned:

• Hock Tan's retention incentives are tied to achieving up to $120 billion in AI revenues.
• Oracle's RPO number is in the hundreds of billions of dollars.
• Electrical capacity in the US hasn't grown significantly in the last 20 years.

Brief Synthesis/Conclusion of the Main Takeaways:

The main takeaway is that the analyst believes the rapid growth in the semiconductor sector, particularly for companies like Broadcom and Nvidia, is sustainable for the foreseeable future. While there are potential challenges, such as financing and energy bottlenecks, companies are taking steps to address these challenges. The analyst acknowledges that there will likely be a slowdown at some point, but it is not expected in the near term.