Time to Avoid AI Stocks? Or Are They a Once-in-a-Decade Buying Opportunity?

Artificial intelligence (AI) stocks have been the ticket to a big investing win in recent years. They've powered the S&P 500 to three straight years of gains and fueled the bull market as names like Nvidia, Palantir Technologies, and CoreWeave have soared. But in recent weeks, some investors have rotated out of AI stocks and other tech players as various elements have weighed on investors' appetite -- from concern about their valuations to worries that AI will rival software, and as a result, hurt growth at software companies.

So, now, you may be wondering if you should avoid AI stocks and move on to other industries or take advantage of the declines to get in on some of the world's leading players. Is it time to avoid this industry that has delivered incredible gains to investors in recent years? Or is right now a once-in-a-decade buying opportunity? Let's find out.

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The AI revolution

As mentioned, AI stocks have been the driver of market gains over the past few years. This is because the technology holds the potential to revolutionize many areas -- from manufacturing to drug discovery and even office operations. All of this may result in earnings exploding higher at companies that develop, sell, or use AI tools and services. We've already seen many of these players, such as the companies I noted above, report revenue gains in the double and triple digits. And as AI use advances, this may continue.

But the story isn't without risk. Some investors, seeing valuations of AI stocks and growth stocks in general soar, have worried that such levels aren't sustainable. The S&P 500 Shiller CAPE ratio, an inflation-adjusted measure of stock price in relation to earnings per share, reached one of its highest levels ever earlier this year, showing us that stocks today are expensive.

S&P 500 Shiller CAPE Ratio data by YCharts

This higher valuation trend weighed on investor sentiment back in November, with some worrying that an AI bubble may emerge. And just last week, another concern arose. Anthropic launched new AI tools, stoking concern that these and similar products could replace core products sold by software and data companies. Nvidia chief Jensen Huang called these fears "illogical," saying that AI will boost current software products rather than replace them.

What should investors do?

All of this has resulted in declines in certain AI and technology players -- such as software stocks -- in recent days and weeks. Now, let's return to our question: Should you rotate out of these players, or view this as an opportunity to get in on them at a good price?

It's important to consider what we've heard from companies in recent earnings reports concerning demand and revenue growth. And, here, the message has been overwhelmingly positive. Chip manufacturer Taiwan Semiconductor Manufacturing and chip designer Advanced Micro Devices each reported double-digit revenue gains and spoke of high demand. TSMC works closely with chip designers as well as cloud providers -- those that directly serve AI customers -- so it has a clear view of whether customers are flocking to AI products. And so far, demand has been consistently strong.

Alphabet and Amazon

In recent days, we've heard directly from cloud providers including Alphabet and Amazon (NASDAQ: AMZN), and both have spoken of their intentions to pour investment into AI infrastructure to meet demand. Amazon aims for $200 billion in capital expenditures this year to support demand from AI and non-AI customers and is immediately monetizing new capacity as it opens up.

So, we aren't seeing signs of a slowdown. And if we look at AI as a technology, we're still in the early stages of the story. We're just entering the phase of applying AI to real-world problems, and further down the road, AI is set to play a central role in robotics, drug discovery, and autonomous vehicles. This suggests much growth lies ahead for AI stocks as well as software companies and others that use or develop AI.

This means recent declines in certain AI stocks and other quality tech companies shouldn't be seen as a reason for alarm. Instead, for the long-term investor, the movement should be considered a buying opportunity that may only happen once in a decade.

Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Nvidia, Palantir Technologies, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.