IT'S OVER! I Can't Stay Quiet on AI Stocks Crashing Any Longer

AI Stock Selloff: Analysis & Investment Opportunities

Key Concepts:

• AI Bubble Fears: Concerns about inflated valuations and unsustainable growth in AI-related companies.
• Custom AI Chips: Specialized semiconductors designed for specific AI workloads, requiring significant investment and lead time.
• Free Cash Flow (FCF): A measure of a company’s financial performance, representing the cash a company generates after accounting for capital expenditures.
• Price-to-Earnings (P/E) Ratio: A valuation metric comparing a company’s stock price to its earnings per share.
• Discounted Cash Flow (DCF) Model: A valuation method estimating the value of an investment based on its expected future cash flows.
• Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, and equipment.
• MTIA (Meta Platforms Training and Inference): Meta’s custom AI chips for training and running AI models.
• TPU (Tensor Processing Unit): Custom AI accelerator developed by Google.
• Gawatt: A unit of measurement for computing power, often used in the context of AI accelerators.

Oracle & Broadcom Earnings: The Catalyst

The recent selloff in AI stocks was triggered by earnings reports from Oracle and Broadcom. Oracle experienced its worst single-day percentage decline since the dotcom bust following a report of lower-than-expected revenues and significantly increased AI spending, resulting in a negative $10 billion free cash flow for the quarter – double analyst expectations. This raised concerns about the cost and timeline for realizing returns on AI investments.

Broadcom’s situation was different. While they beat revenue and earnings per share expectations, the stock plummeted, losing around $220 billion in market cap. This was due to management warnings about declining gross margins as custom AI chips become a larger part of their portfolio and delayed revenue recognition from their $21 billion agreement with OpenAI until 2026. Both stocks are down over 10% as a result.

Wall Street’s Miscalculation & The Opportunity

The presenter argues that Wall Street is incorrectly treating all AI stocks as if they are facing the same challenges as Oracle. He emphasizes that Broadcom’s situation is fundamentally different, highlighting their established expertise in custom chip design and manufacturing. Broadcom has previously designed and manufactured chips for Google (TPUs), Meta (MTIA), and ByteDance (TikTok).

The presenter points out that the OpenAI deal, while not immediately revenue-generating (expected in 2026), positions Broadcom for future success. Developing advanced AI accelerators is a lengthy process, and increased demand will likely lead to further lucrative contracts. Broadcom currently has a $73 billion AI order backlog, including $21 billion from Anthropic. Furthermore, Broadcom’s revenue is growing at 28% year-over-year, with AI chip revenue up 74% over the same period. Over the last 10 years, Broadcom’s compound annual growth rate is 19%, compared to Oracle’s 5%.

A key distinction is free cash flow. Broadcom’s FCF has been consistently growing, while Oracle’s has declined to a negative $10 billion, forcing them to rely on debt to fund AI initiatives. Oracle’s recent earnings were boosted by a one-time $2.7 billion gain from selling their stake in Ampere Computing, and Broadcom had a one-time $4.5 billion tax charge.

Highlighted Stocks for Investment (During the Selloff)

The presenter identifies three stocks as particularly attractive investment opportunities during the current market downturn:

1. AMD (Advanced Micro Devices):

• Current Situation: Down 15% in the last month due to competition from Nvidia and Google’s TPUs, and further down 5% after Oracle/Broadcom earnings. Trades at a P/E ratio of around 100.
• Why it’s undervalued: The P/E ratio is misleading given AMD’s expected earnings growth. Earnings are projected to double next year, driven by a projected 80% annual growth in their data center business over the next 3-5 years.
• Key Opportunity: A significant deal with OpenAI to deploy up to 6 gawatt of Instinct GPUs, potentially worth over $100 billion in data center revenue. This validates AMD’s Instinct and Rockom ecosystems, potentially attracting further contracts.
• Diversification: Approximately 43% of AMD’s revenue comes from the client and gaming segment (PCs, GPUs, game consoles), providing a buffer against AI-specific downturns.
• Valuation: DCF models estimate AMD’s fair value at $380 per share, compared to a current trading price of around $210 – over 40% undervalued.

2. Meta Platforms:

• Current Situation: Selling off due to investor concerns about AI and infrastructure spending, reminiscent of the metaverse concerns in 2022. Capex is projected to increase to $70 billion in 2025, with further increases in 2026.
• Why it’s undervalued: Meta is already monetizing AI through improved ad targeting, automated tools, and AI-driven shopping. AI-driven advertising revenue is already over $60 billion annually.
• Scale & Reach: Roughly 3.5 billion people use at least one Meta app daily, and 4 billion monthly.
• Diversification: Revenue streams are diversified across advertising, commerce, payments, and AR/VR.
• Valuation: DCF models suggest Meta is 23% undervalued, with a 30% upside potential.

3. Microsoft:

• Current Situation: Increasing investment in AI data centers ($80 billion in 2025, with further increases in 2026). Concerns about monetization speed.
• Why it’s undervalued: AI is already contributing to Azure’s growth, co-pilot adoption, and overall profit growth.
• Diversification: Highly diversified across products, software, and services (LinkedIn, GitHub, Visual Studio, SQL, Microsoft 365, Teams, Azure, Xbox).
• Valuation: DCF models estimate Microsoft’s fair value at $600 per share, implying a 25% upside from its current price of around $480.

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Conclusion

The presenter concludes that the AI stock selloff represents a significant opportunity for long-term investors. He argues that the market is overreacting and treating all AI companies like Oracle, despite fundamental differences in their financial health, growth potential, and diversification. He recommends AMD, Meta, and Microsoft as particularly attractive investments, emphasizing their strong revenue streams, diversified businesses, and potential for significant upside. He reiterates the importance of investing in oneself as the best investment one can make.