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AI – The Next Big Bang for Productivity?

Last Updated January 15, 2024 10:41 AM
Giuseppe Ciccomascolo
Last Updated January 15, 2024 10:41 AM

Key Takeaways

  • Artificial intelligence (AI) has the potential to be the biggest productivity enhancer to the global economy since the rise of electricity, according to T.Rowe Price strategist Dominic Rizzo.
  • He adds there are three themes when investing in global technology.
  • When investing in AI stocks, active management really matters.

In the ever-evolving landscape of artificial intelligence (AI), akin to historical revolutions, a dichotomy of potential victors and opportunistic followers seeking to ride the wave of success, often amplified by media acclaim, emerges. Embedded within this tide lies the looming specter of a financial bubble, an inherent risk that proves challenging to avert.

What can be done, according  to Dominic Rizzo, portfolio manager of the Global Technology Equity strategy at T. Rowe Price, is to be more selective than ever, also looking for companies with clean balance sheets and reasonable valuations in the AI trend.

Is AI A Megatrend Or Just A Bubble?

Rizzo said: “I think artificial intelligence has the potential to be the biggest productivity enhancer to the global economy since the rise of electricity.”

In the realm of global technology investing, his primary focus centers on identifying companies pioneering innovation in secular growth markets. Currently, the pivotal theme capturing Rizzo’s attention is the ascendance of artificial intelligence.

He added: “I think that in order to invest in the artificial intelligence stocks, you have to find the linchpin companies that are enabling AI in order to happen. These are primarily in the digital semiconductor space and the semi capital equipment ecosystem.”

The second trend that T.Rowe Price is seeing in all of the global technology all around the world is a continued transition from offline retail to online retail.

Another prevalent trend across the global tech landscape is the ongoing shift from offline to online retail. E-Commerce companies in Latin America, Europe, the United States, and Asia are helping to facilitate this.

Moreover, the enduring trend of cloud adoption remains paramount. In today’s software-intensive global economy, enterprises worldwide are strategically emphasizing robust software and data strategies to stay competitive.

How To Build An AI Investment Portfolio

To navigate strategic technology investments effectively, the initial step involves identifying companies specializing in pivotal technologies. Subsequently, it’s crucial to focus on technologies poised to outpace the growth of the markets they serve.

Rizzo said: “For instance, the artificial intelligence chip market is projected to surge from $30 billion in 2023 to $150 billion by 2027, indicating substantial demand for digital semiconductor companies like Nvidia, AMD, or TSMC.”

The third critical factor lies in assessing and improving fundamentals, translating to expanding operating margins and enhanced cash flows. Finally, ensuring investments are made at reasonable valuations completes the strategic approach to building a robust portfolio in the dynamic landscape of strategic technologies.

Startups Or Big Companies: Who’s Stronger In AI?

The pervasive influence of AI could permeate every facet of the technological landscape. If it does, it will encompass the semiconductor ecosystem, software, the Internet, and payment systems. This ubiquity suggests that the primary beneficiaries are likely to be large corporations. Success in the AI domain hinges on three key factors: data, distribution, and access to chips. These are attributes that major corporations inherently possess.

In AI, large enterprises strongly hold an advantage. Powerhouses like Apple and Microsoft are exceptionally well-positioned due to their extensive data reservoirs, broad distribution networks, and access to semiconductor technologies.

Rizzo said: “While it’s true that these stocks have witnessed substantial growth, the current market phase remains favorable for the technology sector. Artificial Intelligence is amplifying the significance of these ultra-large-cap companies, solidifying their pivotal role in meeting the evolving needs of customers.”

Tech Sector: A General Overview

Rizzo said: “In my assessment, the majority of tech companies showcase improving fundamentals and maintain reasonable valuations when viewed within the broader tech landscape.”

Over a two-year period, the price-to-earnings ratio hovers around 21, with historical peaks reaching 27. These valuations are, unequivocally, deemed reasonable.

Even a notable entity like Nvidia, when scrutinized over two years, trades at around 26 or 27 times the earnings anticipated by analysts.

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