Why AI will have a bigger impact on the world than the invention of electricity

Artificial intelligence has been a buzzword in financial markets across the globe since the release of ChatGPT to the public in November 2022. 

It's pushed stocks like NVIDIA (NASDAQ: NVDA) to eye-watering heights - with its share price soaring 290% since then. 

Earnings expectations for NVIDIA, by the way, have exploded over that period, all on the back of the productivity promises made by AI. Back in November 2022, the street expected that NVIDIA would deliver 62 US cents in calendar year 2025. Today, analysts expect the company will earn US$3.75 per share next year. 

And yet, despite the stellar run in AI-related companies over the last year or so, and mounting concerns that investors may have gotten ahead of themselves on the momentum behind many of these stocks, T.Rowe Price's Dom Rizzo believes investors are still underestimating the true potential, size, and duration of this burgeoning technology's global economic impact.

In fact, he argues it will likely be the biggest productivity-enhancing technology for the global economy since the invention of electricity. 

But, with productivity-enhancing technologies usually comes speculative bubbles. Take the Railway Mania bubble in the UK in the 1840s, for example - or more recently, the dot.com boom and bust in the late 1990s/2000s.  

"I think inherently, that's what will happen with AI... But if you look at the stocks, most of them have just lifted with earnings growth. And so I'm not sure we're in this period of the irrational exuberance of a bubble like we were in the late 90s, very early 2000s," Rizzo says. 

So how do you pick the real AI winners from the imposters? 

Rizzo believes it all comes down to a solid investment framework - and one that reflects who investors are as a person at that. 

"One of my favourite investment frameworks I've ever heard was when someone said, "I'm a pretty boring person and I like boring stocks." They bought stocks like consumer staple stocks and utilities and they did great over time. I like innovation and I like change," Rizzo says. 

There are four essential factors that Rizzo uses to identify innovative tech stocks. These include: 

1.  Linchpin technologies: If a linchpin falls out, the wheel will fall off the axle - so Rizzo is looking for companies with mission-critical technologies for the success of their customers - or those that make their users' lives dramatically better. 
2. Companies that are innovating in secular growth markets: Rizzo doesn't want to buy companies that sell lifeboats to sinking ships, he's after companies that are taking share in fast-growing end markets. 
3. Improving fundamentals: This could be accelerating revenues, expanding operating margins and improving free cash flow conversions. 
4. Reasonable valuations: Unfortunately, however, the market is smart and you often have to pay up for high growth opportunities. 

In this episode of The Rules of Investing, Livewire's Ally Selby learns about some of the companies that meet these criteria, why Rizzo believes AI will be far more transformative than investors currently think, as well as why he believes that investors are likely to do more harm waiting for a correction in some of these tech winners than a correction itself. 

Plus, he shares what he is seeing on the ground in the US right now in terms of economic weakness, the stocks he believes are worth paying up for right now, and how he takes advantage of sell-offs when he holds very little cash. 

Note: This episode of The Rules of Investing was recorded on Wednesday 14 August 2024. 

Other ways to listen: 

• Podbean
• YouTube

Timecodes:

• 0:00 - Intro 
• 2:10 - Making sense of the volatility in tech stocks 
• 3:11 - This is a healthy bull market correction 
• 4:44 - The true transformational nature of AI 
• 8:11 - Spotting the imposters from the real AI winners
• 11:06 - There are risks but we are starting to see business acceleration from AI
• 13:27 - Should you take advantage of sell-offs in AI companies? 
• 15:08 - What Dom is seeing on the ground in the US in terms of economic stability
• 17:08 - How to identify winning tech stocks 
• 19:53 - How Dom thinks about risk 
• 22:01 - Dom's wishlist of stocks he would own at a cheaper price 
• 24:15 - Stocks it is worth paying up for right now 
• 26:32 - A deep dive into semiconductor stocks and cycles 
• 30:20 - NVIDIA at the point of deceleration and what this means for investors
• 31:16 - How to take advantage of sell-offs with very little cash 
• 34:19 - One thing investors are getting wrong about markets 
• 34:53 - Biggest lessons Dom has learnt during his career 
• 39:06 - One stock Dom would hold if the market closed for 5 years

Confident investing starts with curiosity

At T. Rowe Price, they ask the right questions about opportunities like health care innovation and artificial intelligence. And since 1937, actively investing in the answers that can help make the difference to your clients' investments. Learn more here.