Institutional fund managers think there are clear risks with buying semiconductor equipment stocks at today’s prices. But they’re still doing it anyway.
The fundamentals supporting rising share prices still look pretty good – at least, for the time being. So what should ordinary investors like me do?
What are the professionals doing?
Professional fund managers think long semiconductor equipment stocks is the most crowded trade right now. That’s according to the latest Bank of America survey.
Source: Hedgefundtips
On the face of it, that looks like a sell signal. For stocks to keep going up, there needs to be more buyers – and those appear to be running out.
The thing is, it’s not quite as straightforward as this. Despite their reservations, the percentage of managers overweight in equities is at a record high.
Source: Hedgefundtips
In a way, it makes sense – institutional investors can’t afford to miss out on what looks like the only game in town. But things are different for the rest of us.
If you’re investing your own money, you don’t have to participate in everything. So should you do what the smart money is saying, or what it’s doing?
Follow the money
In fairness, the AI boom isn’t just hype and hope. Companies involved in building data centres are making huge profits.
One stock I refer to a lot in this context is Micron Technology (NASDAQ:MU). The company reported Q1 earnings per share of $12.07 – up 756% from the previous year.
That’s a huge increase, which is why the stock is up. And analysts are expecting this to continue at least into next year:
Source: Nasdaq.com
In my view, this is a highly plausible assumption. The reason is pretty straightforward – data centre spending is set to keep going higher.
Amazon, for example, is expected to spend $200bn this year on AI. And analysts think that number is going to reach $209bn in 2027.
While the spending keeps coming, the likes of Micron should do well. But sooner or later, it will stop – and when that happens, things could get ugly.
Warren Buffett
There’s a Warren Buffett quote that I think long-term investors should keep in mind at times like these. It’s this one:
If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.
If AI spending stays at its current level for 10 years, Micron shares look like a bargain. But I don’t think that’s likely.
Amazon is still building into strong demand and it might stay that way for another 18 months. But there’s no way of knowing when things will change.
The issue with Micron is that its earnings don’t just go down in a downturn – they go negative. And investors won’t want to own the stock if that happens.
Source: Fiscal.ai
The stock is at $965 right now. It might well go higher from these levels, but I also think there’s a good chance it’ll be below $500 before 2030.
Is it too late to buy?
The smart money is backing AI stocks. And as long as the likes of Amazon keep spending, there’s good reason to expect this to work in the short term.
From a longer-term perspective, however, things look different. With a 10-year horizon, I think the opportunities elsewhere look much more attractive.
Stephen Wright owns shares in Amazon.
