The artificial intelligence (AI) revolution is reshaping the investment landscape. While tech giants like Google and Microsoft have initially dominated AI development, the focus is starting to shift.
Smaller, specialised companies are now emerging across various sectors, from healthcare startups using AI for precision medicine to agricultural firms developing autonomous farming equipment.
This broadening of the AI market is creating diverse investment opportunities beyond the tech giants.
Matthew Cioppa,
Franklin Technology Fund
“Many of the world’s largest tech companies are leading the sector through the first ‘build’ phase of generative AI, which is ongoing. This has been driven by market dominance in critical enabling technologies across semiconductors and cloud infrastructure,” Matthew Cioppa, co-portfolio manager of Franklin Technology Fund, told AsianInvestor.
This dominance, however, is expected to evolve. As enterprises begin to implement AI applications in production environments, Cioppa anticipates a broadening of the market that will benefit various software and internet service providers.
From a historical perspective, Oliver Cox, equities portfolio manager at JP Morgan Asset Management, highlights that tech cycles typically follow a pattern.
“From past experience, tech cycles have tended to see three waves: semiconductor stocks outperform first, then more general hardware names catch up, and finally, software and services start to outperform too,” Cox told AsianInvestor.
EMERGING OPPORTUNITIES
As the AI market evolves, both experts agree that new investment opportunities are emerging.
“In software, we think data infrastructure companies are well positioned, as their platforms are critical for enterprise AI adoption. We also think certain application software companies will be long-term AI winners, particularly those that hold critical data and help enterprises drive efficiency,” said Cioppa.
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Specific areas in the semiconductor and hardware supply chains are also showing promise, according to Cox.
“We have seen an expanding list of supply-chain companies in Taiwan, Japan, and South Korea which are seeing accelerating revenue growth driven by the Nvidia-led rollout of AI servers,” said Cox.
He mentions high-bandwidth memory, chip testing, optical transceivers, and substrates as key areas of growth.
Oliver Cox,
JPMAM
“We are seeing a number of competitors trying to challenge the leadership positions in the AI software and AI semiconductors space. Ultimately, judgement of these challengers’ success comes down to usage, hence we are closely monitoring competition and which services are gaining in popularity,” said Cox.
For smaller companies entering the AI space, Cioppa emphasises the importance of differentiation.
“For smaller companies, it is critical to have a differentiated approach that can drive a superior outcome relative to incumbents. For example, in hardware, this could be a chip company that enables superior AI training or inferencing outcomes relative to Nvidia,” said Cioppa.
EARLY DAYS
There remains a lot of optimism about the long-term growth potential of the AI market, according to both experts.
“We think AI represents a major computing platform shift, akin to the mobile, internet, and cloud computing eras. If this is true, we should see substantial growth for the technology sector over the next decade,” said Cioppa.
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“In the coming years, we believe we’ll see AI drive substantial productivity gains across both horizontal use cases, such as software development and customer support, as well as vertical use cases, such as drug discovery and robotics,” he said.
Cox also highlights that the market has seen valuations re-rate significantly for the major US names, but by comparison, re-evaluation for many parts of the Asia Pacific-based supply chain has not been seen yet.
“I still think there is scope to catch up,” he said,
“During the past three tech cycles, we saw global semiconductor industry sales grow year on year for 10 quarters in a row. During that period, tech hardware stocks generally outperformed for almost the entire time. In the current cycle, we are only now in the third quarter in a row of positive YoY sales growth,” said Cox.
Therefore, despite the strong recent performance, this cycle still looks relatively early, he said.
“Ultimately, a key question to consider as this cycle unfolds is whether enhanced AI software and hardware products move us from a ‘Co-Pilot’ to a ‘Pilot’ era, where AI significantly enhances human productivity and unlocks potential across various areas,” said Cox.
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