With NVIDIA soaring 200% YTD, is it too late to invest in AI?

Fri 18 Aug 23, 9:45am (AEST)
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Key Points

  • AI is a multi-year investment theme, but the "big early money" has already been made
  • The best growth opportunities in AI are in application companies like Microsoft, Google, and Amazon says Alex Pollak, CIO of Loftus Peak
  • Investors should be careful about the price they pay for AI stocks, as the sector is "curly" and not simple

Having invested a very small amount of money in GPU chip manufacturer NVIDIA about two years ago, recently, I've been asking myself if I should be investing more. More than anything, though, I worry that it is too late to do so. 

After all, the stock has already rallied more than 200% in 2023 alone. It's also incredibly expensive - with NVIDIA trading on a PE ratio of more than 226 times today (and a forward PE of 68 times). 

While dreams of further enormous gains may be unrealistic from here, disruptive innovation specialist Alex Pollak, CIO of Loftus Peak believes artificial intelligence is not a bubble but a multi-year growth story that could change the very fabric of humanity - just as the steam engine or the wheel did all those years ago. 

In this interview, Pollak - a former Sydney Morning Herald finance journalist and Macquarie investment banker turned global fund manager - shares which stocks he believes can continue to benefit from here.

Plus, he shares why every investor should have shares in NVIDIA and Microsoft (subject to valuation) in their portfolios. 

Note: This interview was recorded on Wednesday 9 August 2023. You can watch the interview or read a summary below. 

The easy money has already been made in AI

While Pollak admits that AI will be a multi-year investment theme, he argues that the "big early money" has already been made. 

He compared the societal and economic impact of AI to that of the invention of the steam engine - which was originally invented to remove water from mines but actually "turned out to be a mechanism for decoupling economic growth from population growth." 

In this way, AI is capable of "decoupling productivity growth from population growth again", Pollak says. 

"If you look at the history of what has happened... it has been an ongoing story of better technology being able to lift people's living standards," he says. 

"Yes, there have been casualties along the way, of course. People have had to retrain, people do lose jobs, and environmental issues do happen, but there was once a period when the world worried whether they could feed a billion people - now we're feeding seven plus billion." 

Unsurprisingly then, Pollak doesn't believe AI is a bubble - arguing instead that its applications will be vast and long-lasting. 

"One of the big companies that are involved in AI is Microsoft (NASDAQ: MSFT) ... One of the largest providers of applications to enterprises around the world," he explains. 

"By adding an AI copilot onto an existing application that you're using, it will significantly improve your productivity... [but it will] take time for people to get comfortable with the level of automation that now becomes capable as a result. 

"That's why I say that we've had some early big wins in AI. Now, it will move into the slower game where people really start using the tools. And the companies that use the tools the best will perform the best."

Where the best growth opportunities are today 

So which companies are actually doing that? Glad you asked. 

Pollak points to MicrosoftGoogle (NASDAQ: GOOGL), and Amazon (NASDAQ: AMZN) as examples of application companies that could benefit, while networking companies such as Arista Networks (NASDAQ: ANET) and Qualcomm (NASDAQ: QCOM) are also making waves in the space. 

Similarly, chip manufacturers such as Advanced Micro Devices (NASDAQ: AMD), TSMC NASDAQ: TSM) and NVIDIA (NASDAQ: NVDA) are highly prospective as well. That said, Pollak doesn't recommend investors bet the house on these stocks and apply a set-and-forget strategy. 

"It'll take a little bit more time to actually see exactly which companies come out of the blocks with better solutions," he says. 

"Recall this, in the first five or 10 years of online retail, it took a few years for Amazon to really emerge as the company that was disrupting retail in the broadest sense. 

"This is what we do inside of our business. We churn through the beneficiary companies and the enabling companies for AI to try and find those that are most exposed." 

And the price you pay is equally important. 

"One company that every investor should own is Microsoft and NVIDIA... But I have to say that you have to be very careful about the price at which you buy those companies," Pollak says.

"New data points emerge, which change the expensiveness or the cheapness of the companies. So it's not a set-and-forget thing, right... AI is a curly business. It's not simple." 

We're headed towards a "Goldilocks" economy 

Today's market is a rare "goldilocks" scenario where all the inputs are falling in order, Pollak believes, such as GDP slowly starting to rise, inflation starting to fall, and interest rates going on pause. 

"It's been a very good time and there's nothing really on the horizon that should break that over the short to medium term. That's our read on it," he says. 

"That can change, but it looks a little like Goldilocks to us. A lot of things are going the right way."

Music to investors' ears...

Alex Pollak's view from the top

After 30 years in markets, Pollak's top tip for investors is to be as granular as possible when making investments. 

"Real specificity around what it is that you're investing in is absolutely critical. You have to ask yourself the right questions," he says. For example, a diversified miner with lithium exposure may not be the best way to get access to the critical mineral. 

"Understand exactly how much exposure [a company has], what the economics are behind extracting lithium, the problems with shipping it, the environmental problems around producing it, the end product itself and the quality of it," he says. 

"Unless you are very specifically considering those issues, then you're not likely to get [the return you were hoping for]. You may get lucky and get the investment outcome that you like, but you are leaving a lot more open to luck." 

So which metrics do Pollak and his team use? He points to long-term discounted cash flow calculations (DCF) as the key - rather than focusing on quarterly data points. 

"We never use [quarterly numbers] as the basis for investment," he says.

"I'll tell you why. Back when we invested in Amazon all those years ago, we invested in it before it was widely understood what they were doing with respect to Amazon Web Services, the cloud business. 

"We became aware through our research that the business was widely patronised by Fortune 500 companies... And yet, there was no breakout line in the Amazon P&L for what AWS was doing, but we could see that there was billions of dollars worth of revenue that must be being paid." 

That granular focus allowed Pollak and his team to buy Amazon with much more confidence, he says. 

"AWS is now a bigger business than retail, and we've ridden that thing all the way up," Pollak says. 

"We have similar growth stories, nestled, hidden, which is the way we like it within our companies that will drive the next three to five years of growth." 

This article was first published for Livewire Markets on Friday, 18 August 2023.

Written By

Ally Selby

Content Editor

Ally Selby is a content editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian Group, Your Money, Sky Business and Sky News.

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