There are just a small number of companies which genuinely offer investors exposure to artificial intelligence but the opportunity will only get bigger, according to Alexandre Zilliox, who runs an AI and robotics fund at Natixis.
He told FTAdviser that, despite the hype, the number of companies which will significantly benefit in terms of their earnings from AI in the short-term was "very low".
Zilliox said: "Obviously Nvidia is one of them, but even others such as Microsoft and Google, they do benefit but I mean it’s not going to double their earnings. Then you have lots of companies that are just buying a solution from others, but describe themselves as AI companies. Those businesses tend to not have a research and development pipeline and as such, and those are the companies we want to avoid.”
His view is that in the current initial stage of the AI cycle, which is where he believes the market is now, is one in which only the infrastructure providers are winning - companies such as Intel, AMD and Nvidia.
Zilliox said: "But the next stage will be around data, and the companies that you store and analyse data using AI. The final step then will be around software, as software will allow for electronic design automation, enabling the engineers to build the chips. I think those are the phases where a wider range of companies come to market that represent an opportunity in AI. The other challenge is that there are some businesses out there that probably will create an AI product, but it will be in such a niche area that, its not going to be a source of long-term returns.”
Despite the somewhat cautious tone, Zilliox is bullish about the long-term prospects for AI, saying that as a result of events this year: “We now know AI is not a fad. But the key is not to invest in just any of them. We focus on companies that have some earnings already achieved.”
Orbis's view is that it is more concerned about the level of expectation priced into the valuation at which NVidia shares trade.
They said: “A few years ago, Nvidia was lesser-known, too— at least outside of gaming and crypto circles. AI enthusiasm sparked by ChatGPT has changed that. As the designer of the leading AI chips and the programming platform used to build software for them, Nvidia is seen as the biggest beneficiary of AI growth. The results are real—Nvidia’s revenue last quarter was double the level of a year ago. For an already-huge, highly-profitable company, such rapid growth is astounding. Well done to them.
"Having doubled revenues this year, investors expect the company to grow by at least 30 per cent annually for years to come. The rub is, that growth potential is now clear to everyone! So those expectations are already reflected in today’s valuation. The company has to deliver exceptional growth just to justify its current price.”
david.thorpe@ft.com
