Keeping it real as the AI opportunity set broadens out

I think as we look back here, you know, two years after the launch of ChatGPT, which was really a sort of seminal moment in the technology industry, we’ve seen a huge amount of advancement in terms of the technology itself. We’ve seen the move from, you know, just text to multimodal in terms of images and video. And we’re seeing these large language models get bigger and more capable. And I think when we think forward from here, these [technology] waves tend to take in some cases over a decade to play out. So we still think the innovation of generative AI and the disruption it’s going to have on industries is only just beginning.

And we’ve hardly seen that it’ll scratch the surface of that opportunity yet. I think there’s more scrutiny as there should be on the significant increase in in capital spending and infrastructure spending we’re seeing around AI, and companies are increasingly having to justify that they’re going to see some return on that investment. There’s always a natural lag between the capital spending you’ll put in to create that infrastructure, and then ultimately the monetisation of new products and services that will provide that return. We’ve seen some early players like a Meta be able to demonstrate that,¹ but we need to see more companies do that and across a wider range of industries and sectors beyond just the technology sector. And I think that will come in time. We’ve also seen NVIDIA launch a strategy partnership with the likes of [business consultancy firm] Accenture to get 30,000 consultants there trained up on the latest and greatest generative AI technology to be able to proliferate that across sectors as well.² So I think that will increasingly lead to us actually using this technology more. And I think, you know, we’ve been very excited about the advent of this technology, but I think more of us actually have to use it and see the benefits of it. And that’s ultimately going to generate more revenues and profits for companies to justify the significant amount of spending that they’re having to make today, or to spend with companies that are doing that spending.

So as we go forward into 2025, I think we need to be more selective after the strong returns that we’ve seen. I think we need to think about companies that genuinely are going to deliver the incremental profits from this new technology that’s going to justify where share prices are.

But I think on the other side, we see the opportunity for those AI beneficiaries to broaden out. You know, in the last couple of years, it’s all been about creating that AI training infrastructure and just disproportionately so many of those dollars just accrue to one company in NVIDIA, which is why you’ve seen such dramatic increases in the profits of that company and the share price of that company. But as we see that start moving into actual use cases of AI, we start thinking about inferencing and networking, upgrading our iPhones or upgrading our PCs. And companies embracing this technology will naturally see a proliferation of opportunities to be able to benefit from that and to invest in that.

And then the other thing that we’re going to see is just higher for longer rates. And again, that’s going to lead to a lot of stock dispersion. And that’s something that’s very different to what we saw in in 2020 or actually for a lot of the period after the 2008 Global Financial Crisis. And again, that’s bringing a focus back to who genuinely are the true leaders and winners and beneficiaries of this new technology and are expectations and valuations for those companies being realistic. And again, the way that we tend to solve for the valuation challenge of investing in the technology sector is to truly find companies that are going to generate more profit than the market expects. That also means that they’re a lot cheaper than the market currently thinks. That’s the eternal way that as a team and as a philosophy, we’ve thought about meeting that challenge of valuation. And again, new technologies are a great place to go and find those companies because those markets tend to be a lot bigger than you expect. And because it’s a winner takes most industry, those profits tend to accrue to one company or one or two companies and again if you can identify them, they’re going to end up disproportionately having much faster profit growth than a lot of other companies.

So that’s a very different environment. And again, it very much helps to be active in this sort of period where you have a new technology, new leaders, you have to do that fundamental bottom-up work to think how big these markets are going to be, who’s going to win, who has a sustainable competitive moat. That’s the way that we think we harness the investment opportunity in new technologies like generative AI. It’s not as simple as just saying, oh, we’re going for mega caps or Mag 7 to small caps now, or we’re going to shift from the US to Europe.

It’s very much identifying the true leaders in a new technology globally, and doing your own bottom-up fundamental homework to think about what is a realistic profit forecast for those companies and what’s a rational price to pay. And we still see, you know, a very ample opportunity set going forward into next year and beyond as we move beyond just training, and just all of that occurring to one company. That gives us a lot more opportunity set to play into. Still probably more on the infrastructure side and the cloud platform side, and with those hyperscalers. But in time as we look out maybe two to three years more on to the software side, the end applications and users. So still a very exciting time to be in the technology sector and we very much are looking forward to 2025.

¹ CNBC Squawk Box, 20 November 2024; Meta is leading the race to monetize generative AI: https://www.cnbc.com/video/2024/11/20/meta-leads-race-to-monetize-generative-ai-morgan-stanley-analyst.html

² Accenture Newsroom 2 October 2024: Accenture and NVIDIA Lead Enterprises into Era of AI: https://newsroom.accenture.com/news/2024/accenture-and-nvidia-lead-enterprises-into-era-of-ai