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.
Dominic Rizzo, CFA
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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.

 

Definition of Terms

Artificial intelligence (AI) is the branch of computer science involved with the design of computers, robots, programmed devices, and software applications having the capacity to imitate human intelligence and thought.

Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each period of the investment’s life span.

Dynamic random-access memory (dynamic RAM or DRAM) is a type of random-access memory (RAM). All RAM types, including DRAM, are volatile memory that stores bits of data in transistors. This memory is located closer to the processor, so a computer can easily and quickly access it.

Graphic processing unit (GPU) is a secondary processor usually dedicated to performing the calculations necessary for producing computer graphics, lessening the burden on the main processor.

Magnificent Seven are Apple, Alphabet, Amazon, Meta, Microsoft, NVIDIA, and Tesla.

Price-to-earnings (P/E) ratio measures a company's share price relative to its earnings per share (EPS).

Return on investment (ROI) measures the profitability of an investment by comparing the gain or loss to its cost.

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