Welcome to Soundbites, weekly insights on market trends and investment strategies brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites we’re talking about artificial intelligence with Jennifer Martin, vice president and portfolio specialist with T. Rowe Price. We talked about names she likes and valuations. And we started by asking why it’s sometimes difficult to predict winners and losers.

Jennifer Martin (JM): A good example is Google. Google’s got all the building elements. They’ve got compute resources, data, talent, applications, and customers. And so, Google should not be disrupted. But what the market is contemplating right now is that the Google business model is predicated on traditional search. AI search is just different. So, will that business model be sound? It might be hard from the business innovation. So, that’s an example of a stock kind of in the grey area and you see it and its multiple. It’s easy just to say this is a winner and this is a loser. But it’s the grey area where maybe you can skate out onto the ice and test to see, maybe something is changing or maybe something is not as absolute.

Valuations in the AI space

JM: The best way to play this mega trend has been the linchpin digital technology companies in semiconductors like an NVIDIA or AMD. But we know this AI theme will expand beyond chips and impact companies across the technology landscape. So, it feels like, near term, most stocks in the technology universe have accelerating organic revenue growth and operating margin expansion through the first half of 2024. But it’s well below its peak valuations. And when you pull all these different elements together — addressable market, where we are on fundamentals – valuations are reasonable. You can look at the IXN, which is the [iShares] Global Tech ETF. It’s trading at, I don’t know, 22 times next year’s earnings? And it historically peaks at 28 times? So, you know, it’s definitely reflecting some appreciation. But we’re not at extremes.

Companies to watch

JM: Within technology, I always point towards Apple, Microsoft, Nvidia, TSMC, AMD, Samsung, Adobe, Amazon, Synopsys. Right now, the companies to watch are the ones that are most directly building the infrastructure for AI. And then, as you kind of go out, we’re looking at software companies like Microsoft, or ServiceNow or Adobe where they’re putting generative AI into their suite of applications. It generates a better user experience, higher productivity, and potentially higher renewal rates or even higher prices.

On being carefully contrarian

JM: This is like a mantra for a lot of the growth investors that I support. Inherently, to generate alpha you have to find an insight that the market does not appreciate. As a result, there are times that the crowd is underappreciating a megatrend. That’s what ‘carefully contrarian’ is. It also could mean the opposite, where everyone is super excited in euphoria, maybe you should start getting nervous! Like, the boat’s too tilted one way. We’re always thinking about, you know, what might the market be missing or underappreciating. Because change is where the alpha is. And that’s what ‘carefully contrarian’ means.

And finally, how should financial advisors navigate such new terrain?

JM: AI is going to be an augmentation tool, not a replacement tool. And, you know, if you think about it, in some ways, generative AI will enable stock pickers to be more capable because generative AI will accelerate and make easier the basic nuts and bolts, like building a model, summarizing earnings calls, like, things that your brain needs to process. Maybe AI can help scale that, freeing up more time to hopefully provide more alpha-generating opportunities. You think about technology cycles, we’ve lived through a big infrastructure build out in ’99-2000. We’ve gone through the cell phone revolution in that mid-2000 time period. And now, we’re being really excited by another new technology paradigm of AI. You know, the market started off a little softer in 2023 and then — boom — AI takes over and there’s just sort of this happy enthusiasm. It’s our job to responsibly navigate this euphoria, and really evaluate individual companies that are direct beneficiaries. But then, also appreciate where we are in the journey from evaluation. Like, how much has the market really re-rated. Active management might be required to navigate all of the change and disruption brought on by AI.

Well, those are today’s Soundbites, brought you by Investment Executive, and powered by Canada Life. Our thanks again to Jennifer Martin of T. Rowe Price. Visit us at InvestmentExecutive.com, where you can sign up for our a.m. newsletter, and never miss another Soundbite. Thanks for listening.


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