Home / Analysis / US tech giants could be a bargain in platform change game: Capital Group

In the AI-fueled rally, some companies will win and others will disappear. But while some parts of the market look hideously expensive, their long-term prospects might justify their valuations.

The Magnificent Seven continue to gallop along amidst an AI-fueled melt-up that’s driven the S&P500 to new heights and left tech sceptics and permabears alike scratching their heads.

But leaving aside the fact that there is, in some cases, literally no alternative to owning them, are they really that expensive? Or does the prospect of a technological leap forward of a similar scale to the Industrial Revolution justify their valuations? 

“A year ago, people would’ve said (Nvidia) was expensive; it’s grown revenues over 200 per cent,” Barbara Burtin, a portfolio manager and research director at Capital Group, tells ISN. “It wasn’t expensive. I think, depending on how you think about the long-term prospects of AI some of those companies might be really, really cheap.”

But other companies investing in AI are yet to see a return on that investment. For some that will continue to be the case – but others are already highly profitable and will be able (and willing) to keep throwing money at the thematic until they get results.

“Will some money be wasted or lost? For sure – but it’s the process of innovation,” Burtin says. “When you think about something like venture capital investing, you invest in 10 companies and some of them will be very successful and the rest of them will completely disappear.”

And contrary to popular wisdom, a rising tide does not necessarily lift all boats. Platform changes – like the advent of the Internet, the switch to digital currencies and away from cash, and the move to cloud computing services rather than enterprise-based server services – tend to reward companies unevenly in the long run.

“When you see a change in platform – a technology change – you quite often see the top one to two companies take the lion’s share of profits from that platform change for many years,” says Matt Reynolds, Capital Group investment director. “The reverse of that is there are some companies where the price expectation is too high relative to what they’ll actually get from the profit pool. When we’ve seen a change of platform it goes to a very limited number of companies.”

In any number of platform changes – be it the internet, digital payments or cloud computing – it’s winners (two to three) take most. And there’ll be some companies that don’t end up winners but are priced like they’re going to be. One area where valuations have already come down quite a bit is electric vehicles, Burtin says.

“It was thought that there would be only a couple of companies, including some of the Chinese companies, and there’s now a lot more competition. But I think a lot of the valuation adjustment has already happened on that one. You have these transitions where people get very excited and think that only one company will have the right technology – and then other companies catch up.”