3 impact stocks to access the AI megatrend (beyond NVIDIA)

Note: This interview was taped Friday 26 July 2024.

If there is any subject that has set financial markets alight over the last 12 to 18 months, it's likely artificial intelligence (AI). AI has been termed, among other things, the Fourth Industrial Revolution, an "awakening" (according to the IMF), and the stock market's "1995 moment".

Hari Balkrishna, Portfolio Manager of the T. Rowe Price Global Impact Equity - I Class, is one such investor who believes that AI has the power to change the world. So much so that it's one of his five key investment themes for 2024.

"I'm looking for companies that positively impact the environment and society," Balkrishna says. "The one thing that investors are getting right is the promise of the technology. From an impact perspective, it could be things like accelerating clinical drug trials or providing education in underserved communities," he adds.

But even though AI has the power to change the world, increase GDP, and fuel productivity, not all AI-linked stocks are impact-worthy investments. 

Chief among them is Nvidia (NASDAQ: NVDA). Although widely considered to be the poster child of the AI movement, it is not a stock that Balkrishna holds. 

To find out why and how he prefers to gain access to the AI megatrend instead, watch this episode of The Pitch or read the edited transcript that follows.

Edited Transcript

What is one thing investors are getting right about AI as an investment opportunity?

Balkrishna: With the qualification that I run an impact fund, I'm looking for companies that positively impact the environment and society. I'm looking at AI from that lens much more than others. But if I think of one thing that investors are getting right, it's about the promise of the technology. 

And when I think about it from an impact perspective, it could be things like accelerating clinical drug trials. It could be things like providing education in underserved communities, which do not exist today. I think that's one thing that investors are getting right.

What is one thing investors are getting wrong about AI?

Balkrishna: I think, and again, we don't traffic in some of the pure play AI names because of our mandate. But the one thing would be the speed with which investors are expecting the return on investment on these massive AI CAPEX bills, to come to fruition - hundreds of billions of dollars of CAPEX on GPUs and AI. 

Eventually, I think the promise will come through. But in the very near term, I think there's a lot of excitement about monetisation coming immediately, which is very typical. And you saw this, and I'm not drawing parallels, but you saw this 25 years ago during the dot-com boom as well, where eventually we ended up with a lot of the technology. But there was a lot of excitement initially. 

What relationship does impact investing have with the broader AI megatrend?

Balkrishna: Firstly, I think it's here to stay because I do think in the long term a lot of these positive technologies and positive impact things will happen. But in the here and now, and maybe even for the very sort of near to mid-term, all that AI development is coming at a cost to humanity and the planet. 

So when we think about the build-out of data centres, we think about how energy-intensive GPUs tend to be. There is a lot of heat dissipation from data centres, and also the way the data centres get powered becomes a big issue. There are some estimates that by 2026, data centres are potentially going to be utilising the same amount of energy and electricity as the country of Japan. 

From an impact perspective, that's a problem because if that is here to stay, that is compounding a lot of the issues we already see in terms of global warming and climate change. We're actively seeking out companies that we believe have solutions to combat that problem, and the good news is there are a few.

I noticed that although we are talking about AI, your fund does not own NVIDIA because it does not fit your investment framework. How so?

Balkrishna: Our mandate is not about finding stocks and justifying an impact thesis. It's about proactively finding the companies that are creating environmental and social solutions for those problems. 

If you take what I said earlier about artificial intelligence and the issues with heat dissipation, and how it gets powered. Instead, we own the solution providers to solve those problems. 

We own a company called Trane Technologies (NYSE: TT) that supplies data centres with cooling technology. Ditto, a company called Vertiv (NYSE: VRT), which does the same thing as well as liquid cooling for data centres, preventing heat dissipation. 

We also would own a company like Brookfield Renewable Partners (NYSE: BEP) that has signed one of the largest corporate PPA agreements with Microsoft. As Microsoft is building out all these data centres, Brookfield will power those data centres with renewable power. So that's more the ilk of the kind of stocks we're looking for. 

Nvidia (NASDAQ: NVDA) by itself, has a lot of good things. I mean, GPU computing is more efficient than CPU computing. But in an ideal world, we're looking for companies with a stronger impact thesis. 

It's not so much picks and shovels as it is about genuinely targeting companies that are generating the solutions for the problems that are getting created. As I said, Nvidia and its GPU chips are more efficient than CPU chips. But in mining those GPU chips, we are creating a heat dissipation problem and compounding the global warming issues. So let's instead own the companies that fix or solve the global warming issue coming out of data centres. 

Looking for more than just returns from your investment?

The T. Rowe Price Global Impact Equity Fund targets specific companies that not only make good economic sense, but also focus on making the world a better place for all. Find out more.

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