From the Field

Where are we in the AI cycle?

Navigating the AI cycle and the reasons why Dom Rizzo thinks we remain relatively early in the AI infrastructure build out.

May 2024 - Dominic Rizzo, Portfolio Manager

Transcript

I think it's really important to remember that navigating all cycles requires an investment framework, and AI potentially being the mother of all productivity cycles particularly requires a strong investment framework. we’re looking for four things to navigate the AI cycle responsibly. The first is linchpin technologies. These are the technologies that are mission critical to the success of their customers or make their users lives dramatically better. The second, these companies should be innovating in secular growth markets. What does that mean? That means taking share in fast growing end markets. The third is that they should have improving fundamentals. That's either revenue that's accelerating, operating margins that are expanding or free cash flow conversion that's improving. And finally you want to make sure you have a reasonable valuation.

I've just been on the road for the past three weeks where I met with over 50 different companies across Korea, Japan, Taiwan, California, Germany. And I still think we remain relatively early in the AI infrastructure build out. If we look at the return on investment of AI, it's some of the highest ROIs we've ever seen, 20-30% productivity increases for users of technologies like GitHub, Copilot. Very high return on AD spend. With that, I think we're going to continue to see the build out of these GPU infrastructures.

So like always at T. Rowe, we're going to try to navigate this environment responsibly. But right now, I still think we remain relatively early despite the recent stock price performance.

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