Technology stocks: AI giving the tech ‘vampire’ superpowers

How long will the AI wave last?

Following two years of back-to-back double-digit returns,¹ investors continue to ask whether investment in generative artificial intelligence (gen AI) is now over; and if we are at the top of the AI hype cycle. While we are no longer in the early stages of the gen AI ‘fourth wave’ of technology, we believe that investors are still underestimating both the length and magnitude of investment required, as well as the long-term disruption and benefits it will bring.

Compute waves are lengthy

Firstly, it’s important to clarify the difference between a compute wave and a theme (like cybersecurity, electric vehicles, or clean technology). A compute wave requires broad investment across the full stack of technology – from silicon building blocks, to user interface and applications. The PC internet era required an initial shift from the analogue world to digital, driving prices of compute down, which democratised access and connected homes. The mobile cloud wave that internet infrastructure was built upon, was catalysed by the launch of the iPhone in 2007. It’s notable that a key mobile application like Uber did not have its initial public offering (IPO) until 2019.

The parallel here is that infrastructure has to be built and scale achieved before the most exciting and useful new applications are fully developed and adopted. The pace of capital expenditure investment in AI data centres has been unprecedented and the demand for accelerated compute from the likes of NVIDIA have grown at an unparalleled pace. However, this generative AI wave has yet to witness an interface shift or new edge device requirements. Our experience shows this to be consistent with the pattern of previous tech waves. It spans resource and productivity optimisation; shifts in payments and financial systems; transportation being reimagined by autonomous capabilities; healthcare diagnostics, surgery and drug discovery; humanoid robots, and the more familiar upgraded PC and mobile devices. We know there is much yet to come as AI copilots and autonomous agents become commonplace across the economy. For investors, patience is required to benefit from this pervasive and transformative wave.

Volatility is to be expected, not feared

And as previous tech waves have also demonstrated, investors should not expect the pace of development and adoption of generative AI to be linear. There are bottlenecks in infrastructure development and the availability of silicon (microchips), such as NVIDIA’s latest Blackwell chip. Indeed, past waves have typically run for more than six years and delivered outsized returns – but all have also involved elevated volatility and frequent drawdowns.²

A changing political regime in the US will bring additional volatility as taxes, tariffs and regulations are reconsidered. Technology and artificial intelligence are a national priority for many countries and central to a broader deglobalisation and reindustrialisation strategy being undertaken. While this is expected to increase volatility, it will also serve as a tailwind to demand in infrastructure and areas like autonomous driving, where we are likely to see accelerated development as new federal laws emerge.

An active stock-picking approach offers more versus narrow thematics

As this AI wave matures into 2025, we believe that active management will be more important than ever. The cost of capital is likely to fluctuate further but interest rates are unlikely to be returning to zero. Hence in our view, valuation discipline will be an important feature of determining returns again. Typically, periods of technology inflection are notable for changes in market leadership, therefore relying on indices heavily weighted to the winners of the last wave may prove challenging.

Going back ten years, seven of the largest 10 technology companies outperformed the broader MSCI All World Index, while only four outperformed the tech index itself. Technology remains a ‘winners take most’ market; higher growth is not guaranteed by shifting down the market cap curve. Companies with a large user base and large platforms are able to more quickly scale new products, with significant resources to do so. Company size preference alone has not been a reliable strategy for stock selection in the technology sector – nor has narrow thematic bias.

Artificial intelligence as a wave underlies a wide variety of long-term investment themes such as Next Generation Infrastructure (including Cybersecurity), Fintech, Electrification (including power, electric vehicles and Clean Tech) and Internet 3.0, which help guide idea generation. A focus on competitive advantage, responsible management, scalable profitability and new product innovation – at a rational price, and irrespective of market capitalisation or geography, is essential. We believe marrying the bottom-up identification of tech leaders and thematic idea generation with underappreciated earnings power can help us to navigate the ongoing challenge of valuation in this dynamic and innovative sector.

Gen AI is giving the tech ‘vampire’ superpowers

The build-out of infrastructure and applications for generative AI is expected to take years to play out. It is important to note that with each wave of technology not only has more investment been required to realise its potential, but more disruption in more sectors across the broader economy has ensued. As the gen AI wave matures, disruption across many other sectors will accelerate – just as it has in the past. The technology sector continues to leverage its balance sheet strength advantage to invest heavily in future research and development, supporting its capability to generate attractive returns for investors.

We continue to be excited by the outlook for technology equities. Our focus remains on finding the leaders across the sector by navigating the hype cycle, and we believe that a focus on stock fundamentals can help to drive consistent returns. As gen AI matures, it essentially gives the ‘vampire’ (technology) superpowers to use its FAANGs to suck more share from the wider economy. We believe that investors will be well served to remain focused on the companies and sectors that are driving, rather than experiencing, disruption.