Don't Give Up on AI Chips Yet, Says JoAnne Feeney

John Feene, who advises capital management, says the recent pullback on AI related stocks is an opportunity, and that investors should focus on the companies with durable competitive advantages. John, it's great to have you back on the program. You know, the the the situation's moving fast and changing quickly. Right? Chip stocks closed in a bear market Friday night on on the idea that better, more efficient AI, less demand for hardware. By the time I came into work Monday morning, we were back to where we were prior to that. There's lots of demand for hardware. Try and explain it to me. Yeah, Ed. You know, you and I have been talking about this for a long time. And right now, I think investors are starting maybe to parse through where the strength in competitive advantages actually lie. You know? First, obviously, it's the suppliers to the data center build out to the, you know, enabling of these AI models, like NVIDIA, like Broadcom, which both of which we've owned for a long time for clients. But now I think people are trying to think about, okay. What about those model companies? Because although, you know, most of them are not public, we're starting to see more and more of them. We saw a couple of announcements in the last week of new very high powered models out of China. We're seeing the price of the implementation, right, of AI in terms of the token cost falling. And it just seems like there's, you know, a concern that the model makers are gonna struggle to be able to continue to differentiate what they're offering. And that suggests profit margins, they are gonna be challenged and that you'd better look elsewhere. And that's why we like the the chip suppliers still and the data centers, because they have other things that they're offering besides just running these models. The security, the stability, the reliability, the data handling, all of that gives them, we think, a more durable, moat, and that would sustain our profit margins. One interpretation post release was it's a 2,800,000,000,000 parameter model that's priced $3 per per million tokens on the input side, $15 per million on the output side. And that would basically be an indication that the Chinese AI companies feel good about where they're pricing it. They see demand. And when we enter the inference phase, there'll be even more demand for NVIDIA based or GPU based platforms. Is that an argument that that tracks for you? Yeah. So I think this competition story among the models is gonna take some time to play out. I think you'll see that gap shrinking over time as more and more models come out with better and better better capabilities. But, you know, the demand will rise, yes, because of lowering costs, on the inference side. And that only then spurs more demand for more data centers, more NVIDIA chips, more Broadcom, design chips, etcetera. So, you know, you just have to think about where the profit margins are gonna be maintained and where they're gonna start to shrink over time. Is it healthy to sort of go from a situation where you enter a bear market to and there have been big swings in the socks. And, I'll remind the audience of your many years covering the semiconductor industry. But, you know, it's amazing how quickly things return to normal, so to speak. You know, I think one of the areas to really be a little bit worried about is the memory space. And I I think they're they're so called priced cheaply like Micron at whatever it is, six times future earnings. Bring it up. There's a reason for that. And and the reason is that those profits, those sales numbers have in large part been driven higher by massive price increases, hundreds of percent. That's not going to be sustainable for forever. And at some point, we're gonna get more supply. And even with, you know, some of the innovations we're seeing in high bandwidth memory, we're going to see those prices come down as more supply comes on. Why? Because you have three players at the leading edge. You have some at the trailing edge. They're all building more capacity, and this is how the memory world works. Some people are saying, oh, this is different. We're no longer in a cyclical, you know, industry. I just disagree. The the game theory behind when these guys add capacity and how much they add has always pointed to them collectively adding too much capacity. It's in their interest to build more capacity for than their current market share justifies because they wanna gain market share. And so we're gonna see those prices come down at some point, and we always see the prices of the stocks come down well ahead of that. So I think that's a particularly dangerous area. I don't know for how long this current, you know, positive momentum is gonna last, but I also don't think it's a problem, Ed, that we're we saw a little bit of a pullback. Investors probably had become overly concentrated. You know, we are pretty active in making sure our investors, our clients are not overweight, you know, any one name. And so you see some diversification, which is simply smart, and and it does lead to these kinds of periods of pullbacks of volatility. Every day, you wanna be able to answer the question, why? Why is something happening? We're showing Micron's up almost 11%, which is only its biggest gain in about three weeks. But you're right. Trades at 6.5 times forward twelve month earnings. Why? What what is going on in the here and now? Well, it's hard to know. I mean, look. Stock prices are noisy. Right? You know, I spent a lot of time, you know, studying asset pricing when I was back when I was an economist. And, you know, we learned looking at the data back then that you you don't look at any one day. You don't even look at a week. You don't look at a You've gotta look at the long term. And what we've been focused on is how are earnings driving the fundamental valuation of a company? What kind of cash flow can they generate over time? And so these periods where you have these big, you know, run ups and and run back downs are are just noise. And so we really focus on long term, investing for our clients, and looking at the fundamentals. Ultimately, that is what supports a company's valuation. And so for Micron, you know, there is a period ahead of them where they're gonna continue to have really strong pricing, where they're going to continue to have strong profit growth. It's just that you don't know when we're gonna get the news that, oh, this is how much new capacity is coming online from all three of these guys. And so, therefore, this is how much prices are gonna fall. It's not that their earnings stop growing. It's that their earnings growth actually at some point probably turns negative because if you get a collapse in prices, then, you know, you have a period of negative growth. And that's happened in Micron's history in the past. And so that's why it is trading where it is, but it also is why I think it's a little bit of a risky place to go.