April 2024 / EQUITY
Navigating the AI cycle
After meeting with more than 50 technology companies across the US, Asia and Europe, Dom Rizzo summarises his key takeaways
Video Transcript
Where are we in the AI cycle?
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.
What is your view on current valuations in technology?
The Magnificent Seven are the poster child for these tech stocks that have gone up a lot and may look expensive optically, but I think we need to take a step back with those seven stocks. In any given year, those Magnificent Seven stocks may grow earnings 2 to 3X faster than the rest of the 400 plus stocks in the S&P 500. And if you look at those valuations versus the rest of the market, they're actually pretty reasonable if you adjust for the growth rates. Those other stocks trade at roughly 17 times earnings today depending on the day. The Mag Seven trades at mid to high 20s, but they grow earnings over 2 times as fast. So, if you look at those PE multiples on a growth-adjusted basis, I actually think most of the technology universe has still pretty reasonable valuations today.
What have you learned from recent investment trips?
I've been on the road for the past three weeks all over Asia, Korea, Taiwan, Japan, in California and in Germany, meeting with over 50 different companies, all throughout the supply chain.
Number one is that GPU spend and getting ready for the GPU build out still remains robust.
The second thing that we've learned is that this may be the best memory setup I've ever seen in my career. Now we have an under invested supply market with a surplus and surging demand that's in the form of AI. AI requires 6X the memory consumption in an AI server versus a traditional server for DRAM memory chips and I think that the memory setup looks strong from here.
The third thing we learned is that there's going to be a renaissance in the Japanese semiconductor market. It's got geopolitically secure supply. We've learned throughout COVID how important it is to have geopolitically secure supply. And now we're learning through AI how important it is to have geopolitically secure supply.
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Dominic Rizzo is the portfolio manager of the Global Technology Equity Strategy. He is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price International Ltd.
