Us Tech Investments – A Must Have in Your Portfolio

Us Tech Investments – A Must Have in Your Portfolio

Global innovation & disruption space offers you exciting investment opportunities and is a must have in your portfolio:

• Such investments have been a rewarding experience in the medium to longer run. Refer the graph. It shows that NASDAQ has over 15 years, beaten NIFTY 50 CAGR returns by a hefty margin of over 10%. Over 20 years the margin between the two is much narrower at 3.1%.
• The added advantage of such investment is that it reduces portfolio risk though diversification.
• International investing has become even more interesting with changes that have been announced in the budget recently. Such investments become long term in 2 years and the rate of long-term capital gains tax has been brought down to 12.5%, in line with domestic equity.
• Secular forces of innovation & disruption are in full swing and Artificial Intelligence (AI) is going to be a mega trend in the coming years. Significant value is expected to be created around this theme. At current valuations, semiconductors segment is our highest conviction trade followed by consumer digital services.

Market backdrop

US technology companies have witnessed a sharp price correction in the last one month. Semiconductor index (SOXX) has corrected from 270 to 200 level (26% sell off). NASDAQ 100 too has corrected around 12%. This correction has been precipitated by several factors coming together at the same time:

• Fear that FED is slow in lowering rates, despite the fact that economy was slowing down at a pace faster than anticipated
• Rising Geopolitical tensions and
• Unwinding of the Yen Carry trades

As on 9th August 2024, NASDAQ 100 trades at a P/E multiple of 32.6 on TTM basis and 28.31 on forward basis. Historically the average of forward P/E for the past 10 years has been 24. The market hence currently trades at a premium of 17% to historical levels.

Keeping in view the significant potential that AI offers, valuations do not look very stretched as such. We view any further sell off in NASDAQ 100 (another 5%), as an opportunity to slowly accumulate US Technology companies, up-to 15% of your total portfolio.

How is the AI opportunity expected to play out over the next 3 to 5 years?

1. Pick & Shovel providers for the AI infrastructure build out will be the first to gain

Entire Semiconductor Ecosystem will benefit hugely

• Training of AI model is extremely computing intensive. This is being evidenced in the huge CAPEX commitments by companies such as Microsoft, Meta, AWS, Oracle and Alphabet. As per estimates from JP Morgan’s AMC team, CAPEX in AI data centres, by these companies is expected to rise from 200 billion USD currently to USD 1 trillion in the next 5 to 10 years.
• GPU’s will drive AI computing – It should be noted that Nvidia’s data centre revenue is expected to grow from USD 15 billion in 2023 to USD 105 billion in FY 25.
• Companies providing software tools for designing chips – Cloud service companies are designing their own custom chips for cost efficiency, and to reduce reliance on outside vendors. Cadence, Synopsis etc., to benefit from this trend.
• Networking equipment – Higher bandwidth connectivity for faster & more efficient movement of data. (Broadcom, Arista Networks, Marvel Tech, Credo Tech etc.,)
• High bandwidth memory – Developing a large language model requires significantly more data, leading to requirement of higher bandwidth memory – Companies that will benefit are Micron Tech, SK Hynx, Rambus, Samsung etc.,
• Fabricators/Foundries – Largely TSMC, but also others like Global foundry, Samsung etc. to significantly benefit.
• Equipment manufacturers – Demand for such equipment’s will rise at a fast clip. ASML, Lam research, Applied Materials will benefit.
• Power – AI servers require 4-5x more power, with different voltage requirements. Regulating power will become much more critical (Monolithic Power).
• Hyperscaler’s such as Microsoft, Amazon, Google, Oracle – Cloud business is a significant part of their sum of the part valuation. Cloud growth will regain strong growth momentum.
• Unstructured data base companies such as – Large Language Model is all about training AI model with unstructured data. Companies such as MongoDB, Snowflake will benefit.
• Companies providing security – More sophisticated AI driven attacks will require equally sophisticated security solutions for identifying such security attacks and breaches – Palo Alto Network, Zscaler, CrowdStrike, Okta to benefit.

1. Companies that will deploy AI for improving their business processes

• Meta – One of the first examples of a company that has leveraged AI for serving a more engaging & customised content to its users and this has led to more eyeballs. Not only this, but the Company has further used AI to focus its advertisement better leading to higher Ad revenue. In the recent quarterly results, META grew its digital ad revenue by over 20%, while other Digital Ad companies grew at between 10 to 12%.
• Netflix – Uses AI for recommendation improvements & natural language processing.
• Trade Desk – A software platform to place ads that aligns with ad buyers to generate the highest returns.
• Booking Holdings – Using AI to bring travel recommendations to consumers and building an AI trip planning tool.
• Tesla – Uses video data and high-performance compute to build autonomous driving functionality.
• Companies offering Co Pilots such as Microsoft, Salesforce etc.,

1. C) Consulting Companies that will help deploy AI driven use cases for different verticals, such as Palantir, Accenture etc fall in this category.