It was claimed that movements in “concept stocks” and their exuberant valuations recalled the bursting of the internet bubble, that sector giants were running out of steam and that Moore’s Law, regarded as crucial for technological progress, was doomed: these were some of the arguments brought forward by the bears, who were galvanised by the decline of a sector that appeared to be in its death throes.
However, the tech sector received a new boost when the first mass-market version of ChatGPT was launched in November 2022. Above all, Nvidia – a US designer of processors, chips and graphics cards – put the smile back on investors’ faces in May with some out-of-this-world guidance. This was a wake-up call as consensus had implied that its stock was significantly overvalued, which proved wrong in hindsight.
So, with the Nasdaq 100 up 31% by the end of May, is it time to climb aboard the tech rocket after the sector’s stunning performance so far in 2023?
The first thing to note is that many companies have seen their valuations run far ahead of their growth forecasts because, as we know, the market does not wait.
In some cases, to get the market’s seal of approval, all a company needs is a press release mentioning the magic words “generative AI”.
So caution is required, about the sector in general and the semiconductor segment in particular: in the short term, we see more value in equipment manufacturers than in chip producers and designers.
Secondly, where a company is perceived to be under threat from ChatGPT and Bard, the market has been indiscriminate. Giants such as Accenture and Intuit initially suffered from the idea that their services could be bypassed by powerful algorithms, whereas these companies actually regard generative AI as an excellent productivity tool.
Although the US leads the way with a number of obvious opportunities ranging from mega-caps to smaller companies, Switzerland also has some attractive companies that are key suppliers to the semiconductor industry. The expertise of VAT Group, Inficon and Comet allows the production of chips that are powerful enough to drive the artificial brains of Google, Microsoft and Oracle. However, opportunities must be measured against the companies’ valuations and the investment cycle in the semiconductor industry, which is seeing secular growth but still subject to large cyclical swings.
If analysis is geared towards seeking value creation as measured by cash flow return on investment (CFROI®), short-term noise can be filtered out. This makes it possible to maintain a steady course, with a preference for companies capable of increasing their CFROI or keeping it stable at a high level, despite the competition. The approach also helps avoid the many companies that have been exciting investors on the basis of unrealistic assumptions.
One thing seems certain: although the disruption caused by AI will extend far beyond the stock market, it still represents a big opportunity for stock-pickers and active asset managers.
Fares Benouari