Hyun Ho Sohn, portfolio manager of the £13.9bn Fidelity Funds – Global Technology Fund, discusses the recent tech rally, fuelled by the “hot” theme of AI, arguing investors should remain realistic in the gains companies will accrue from AI spend.
The technology market has rallied significantly so far this year. Investors are looking past weak macro indicators and remaining uncertainty over inflation to bid stocks higher. However, this is in reality a very narrow, thematically-driven market; the ‘hot’ theme of the moment being Generative Artificial Intelligence (AI).
AI is not new and has been being used in many areas for some time now. However, ChatGPT and other large language models are new, and an important breakthrough. More importantly, this has made people believe in an inflexion in AI technology and a massive investment opportunity ahead; similar in some respects to the sentiment around the then emerging internet in the 1990s.
However, it is important to remain cautious – or perhaps realistic. Every technology company seems to be pitching an AI angle. While some stand to make tangible near term gains from AI, most firms seem to be trying to promote AI-related products, with limited and likely near-term customer traction. For now, companies are having to spend to support AI rollout. It should become clearer over the next 18 months or so whether businesses will start to accrue gains from this spending.
AI infrastructure is being built for new applications, some real, some more on a trial basis. Consumer applications should enjoy earlier adoption than enterprise functions, given the data security/governance issues associated with AI applications for businesses, and the lower risk tolerance levels of businesses generally. We are seeing significant AI infrastructure buildout now but are very likely to see more volatility in this area over time as real demand will take time to materialise.
The mood among corporates is still fairly cautious. Software companies continue to flag the risk from weakening enterprise budgets. Internet businesses seemed more optimistic, while firms exposed to PC and smartphone end markets are starting to look ahead to a possible H2 recovery. Datacentre demand is clearly split between booming AI-related demand, and the still slowing non-AI. We are cautious on the sector as a whole, given the strong rally we have seen, though remain positive on a longer-term basis.
Some investors are concerned about a ‘bubble top’ in technology, similar to 2000. While there are some similarities between the market then and now, there are also important differences. Technology demand today is much more diversified. In 2000, demand was driven by new internet ventures. The supply/demand mismatch was huge, as internet business took off slower than people expected. But even if AI adoption turns out to be slower than expected, IT demand will not collapse, given its much broader diversification across consumer and enterprise fields than was the case two decades ago.
Business models are also overall more robust than in the past, with many more benefitting from recurring, ‘sticky’ subscription-based revenue. In contrast with 2000, demonstrable real-world demand from consumers, enterprises and government entities. And while rising inflation – a key talking point over the last 12 months – would be problematic for all equity sectors, technology companies are also benefitting from stronger pricing power than in late 1990s/2000, given the more structural, persistent nature of demand from end customers now. All of this stands the sector in good stead for the future.
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