AI news is driving tech 'building blocks' stocks like Nvidia. But another 'power' area will also benefit, say these veteran investors

Our call of the day offers valuable insight on tech investing amid AI mania from a pair of seasoned investors.

Inge Heydorn, partner on the GP Bullhound Global Technology Fund and portfolio manager Jenny Hardy, advise choosing companies carefully given high valuations in some parts of tech that could make earnings vulnerable.

“But looking slightly beyond the volatility, tech has the advantage of being driven by many long-term secular themes which will continue to play out despite a weaker macro,” Hardy told MarketWatch in follow-up comments to an interview with the pair last week. GP Bullhound invests in leading global tech companies, with more than $1 billion in assets under management. 

“We try to make sure we’re exposed to these areas that will be more resilient. AI is the perfect example of that –- none of Microsoft, Amazon or Google will risk falling behind in the AI race -– they will all keep spending, and that will continue to drive earnings for the semiconductor companies that go into these servers higher,” said Hardy, who has worked in the investment industry since 2011.

“The way that we think about investing around [AI] is in the building blocks, the picks and shovels infrastructure, which for us is really the semiconductor companies that go into the training servers and the inference servers,” she said.

Nvidia NVDA, +24.37%, Advanced Micro Devices AMD, +11.16%, Taiwan Semiconductor TSM, +12.00% 2330, +4.24%, Infineon IFX, +1.04%, Cisco CSCO, +1.28%, NXP NXPI, +2.89%, Microsoft MSFT, +3.85%, ServiceNow NOW, +5.82% and Palo Alto PANW, +1.80% are all in their portfolio. They also like the semiconductor capital equipment industry — AI beneficiaries and tailwinds from increasingly localized supply chains — with companies including KLA KLAC, +6.20%, Lam Research LRCX, +6.40%, ASML ASML, +6.25% and Applied Materials AMAT, +7.18%.

As Hardy points out, “lots of big tech has given us lots of certainty as it relates to AI, lots of certainty as it relates to the amount they are going to spend on AI.”

Read: Nvidia’s 24% jump Thursday lit an AI fire that carried these 19 stocks to gains of as much as 17%

Enter Nvidia’s results, which Hardy said are proof the “AI spend race has begun…Nvidia’s call featured an impressive roster of companies deploying AI with Nvidia – AT&T, Amgen, ServiceNow – the message was that this technology adoption is widespread and really a new normal.” She said they see benefits spreading across the AI value chain — CPU providers, networking infrastructure players, memory and semicap equipment makers.

Heydorn, who traded technology stocks since 1994 and also runs a hedge fund with Hardy, says there are two big tech trends currently — “AI across the board and power semiconductors driven by EV cars and green energy projects.”

But GP Bullhound steers clear of EV makers like Tesla TSLA, +0.86%, where they see a lot of competition, notably from China. “Ultimately, they will need semiconductors and the semiconductors crucially are able to keep that pricing power in a way that the vehicle companies are not able to do because of the differences in competition,” she said.

Are the tech duo nervous about anything? “The macro economy is clearly the largest risk and further bank or real-estate problems,” said Heydorn, as Hardy adds that they are watching for second-order impacts on tech.

“One example would be enterprise software businesses with high exposure to financial services, which given those latest problems in that sector, might see a re-prioritization of spend away from new software implementations,” she said.

In the near term, Heydorn says investors should watch out for May sales numbers and any AI mentions from Taiwan via TSMC, mobile chip group MediaTek 2454, +3.11% and Apple AAPL, +0.67% supplier Foxxconn 2354, -0.75% that may help with guidance for the second half of the year. “The main numbers in Taiwan will tell us where we are in inventories. They’re going to tell us if the 3-nanonmeters, that’s a new processor that’s going into Apple iPhones, are ready for production,” he said.

Read: JPMorgan says this is how much revenue other companies will get from AI this year

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