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BLUECHIPINVESTMENT | TechnologyNvidia’s dominance get eroded by emerging Chinese production ofchips? There are 1 800 AI models available on the Microsoft Azureplatform. Who will win? And if they do, will it use the Microsoftplatform to host its services or another emerging company whodisrupts the status quo? Ultimately, the range of outcomes is wide,even if we agree at a base-level that AI will change the world, andthere are strong arguments to suggest it will.Stock market expectationsEarnings for Big Tech have surprised on the upside since the AIhype began in 2023 and there has been strong momentum in itsshare prices, which is driven in part by speculation around theoutlook for AI and in part by investors fearing missing out on theAI theme. The risks that the hyperscalers turn these AI investmentsinto earnings growth and profits are high. Recently a few of thecompanies have provided more muted outlooks, citing supplyconstraints and challenges with electricity demand among severalother emerging headwinds.AI is increasingly viewed asessential for survival acrossbusiness and government.We have seen the market show excitement towards newtechnology innovations over the past years as investors lookedto identify the next “new new thing”, including thematic ideas likethe metaverse 3 and NFTs, 4 and even Bitcoin and the blockchain.These ideas have largely perked interest and then subsided asthe embedded risks or commercial viability remain a challenge.There have been other emerging themes like autonomous drivingor energy transitions, where AI is destined to be the technologythat binds this all together. There is also the potential that today’sAI winners are derailed by advances in computing power – ledby the quantum computing industry which has yet to make itspresence felt.AI as a concept has immediate, tangible real-world applicationswith the potential for future evolutions. This provides a level ofcomfort that the benefits could deliver productivity and innovationgains for a while to come. This also means it is important not tofocus solely on AI leaders as the primary beneficiaries.As with past technological advancements, the benefits extendacross the broader economy, driving productivity gains andreducing inflation. It is also likely that there will be a long listof potential losers that are either startups that fail to developa sustainable service proposition or an incumbent that fails toadapt to the AI transition. Companies like Samsung, who havecommitted to developing cutting-edge chip-manufacturingtechnology to rival the incumbent TSMC, have failed to meetthe required quality and efficiency standards and the companyrisks another large derating of its stock.How to access the AI investment opportunityAI technology has the potential to deliver meaningful investmentopportunities, but the major warning for investors is that an AIleader purchased at the wrong price could prove to be a poorinvestment if the resulting growth in earnings doesn’t justify theinvestment made to achieve its dominance. Likewise, missing outon emerging opportunities could mean an investor missing theinvestment of the next decade and beyond.Our investment approach to access the AI investment case ismulti-pronged:1. Start with the index. Buy passive, because we don’t know whothe winner will be. We have done this – conservatively – but ithas added material returns from holding winners which hardlyanyone saw.2. Invest in specialist growth funds, who set out to look for theseopportunities and others like them every day.3. From a valuation perspective, we need to weigh up highprices versus the size of the opportunity, as you can get drawninto overpaying. Like the trajectory of technology out of theInternet boom in the 1990s, it is likely that you will need toadjust positions in portfolios as the market finds its path to theultimate winners as Google and Amazon showed. Balancinglikely reality and optimism is important in this phase.New disruptive technologies like AI will become pervasive,benefiting many companies, creating new ones and renderingothers obsolete. However, accessing these opportunitieswhile avoiding pitfalls is less straightforward. As AI becomesembedded, we expect the path to be one with volatility, alongwith disruptions and surprises, as we navigate this excitingtechnological revolution. Doug Nicol, Investment Analyst, Fundhouse[1] www.elon.edu[2] “The New New Thing – A Silicon Valley Story” written by Michael Lewis about the rise and fall of Netscape.[3] An online world which integrates real life activities.[4] Non-Fungible Tokens – essentially turning data into asset form.28 www.bluechipdigital.co.za
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