Tim Boreham: As AI surges, it’s time for investors to use their (real) brains

The rise of AI and swollen valuations of the Nasdaq ‘Magnificent Seven’ mean it’s more important than ever for investors to think carefully, says Tim Boreham.

Sometimes a real brain can be more value than AI, says Tim Boreham. Photo: iStock

Artificial intelligence (AI) is looking more than a fad, but the swollen valuations of the Nasdaq “Magnificent Seven” tech stocks mean that investors need to use their “real” brains – and imagination – to find the next Nvidia.

(In the very unlikely case you didn’t know this, the M7 are Microsoft, Apple, Alphabet, Amazon, Tesla, Meta and, of course, Nvidia).

For the off-gridders among us who haven’t heard, Nvidia is the poster child of the sector because it makes the graphic processing units (GPUs) to enable the whole darn AI thang.

Following last month’s better-than-expected quarterly results, Nvidia commands a $US3 trillion market cap, equal to that of Apple, the world’s biggest company.

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But can an Nvidia maintain its 90 per cent market dominance over rivals such as AMD and Intel, or Google, which is making its own chip for internal cloud computing purposes?

Betashares senior investment Cameron Gleeson notes that of the 68 brokers covering Nvidia, 61 have “Buy” calls and a further seven have ‘Holds’.

“While Nvidia leads now … there is no guarantee it will hold on to its leadership position in the long term,’ he said.

Gleeson said one reason for caution was that Nvidia’s customers were its Nasdaq mega peers.

“It starts to feel like a Ponzi scheme if all of these tech companies are selling to each other,” he said.

Gleeson isn’t exactly calling an end to the bull run in Nvidia, but prefers the likes of its clients such as Microsoft and Google for their highly profitable and scalable platforms.

He said end users such as banks would not buy Nvidia and develop their own AI, but would avail of established cloud capacity that’s costly to replicate, partly because of the enormous electricity needs.

“That’s where we see AI create real value for the tech ecosystem,” Gleeson said.

Going upstream, Asian manufacturers dominate production of both memory and logic chips.

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Nvidia sources most of its chip material from Taipei-listed Taiwan Semiconductor, while listed South Korean makers such as SK Hynix and Samsung dominate the memory chip sector.

“These Asian manufacturers are trading at a substantial discount to a company like Nvidia but will still benefit substantially from the dramatic increase in demand,” Gleeson said.

Sadly, the ASX is unlikely to host tomorrow’s AI leaders.

Three years ago, Appen (ASX:APX) was the local AI darling on the back of providing human “trainers” to big tech (Google terminated a services contract in January).

“Unfortunately they were able to replace Appen and the share price has fallen 98 per cent from its 2020 highs,” Gleeson said.

“I urge caution with the specific stocks outside of the global ecosystem with large and powerful customers.”

As is usually the case, exchange traded funds offer diversified, low-cost exposures to the Nasdaq – and thus the AI scene.

The Betashares Nasdaq 100 ETF (ASX:NDQ) has exposure to the Nasdaq usual suspects including our homegrown Atlassian.

A little known trait of the Nasdaq is that about half of the investee stocks’ revenues derive from outside of the US.

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Global X has the fancy-schmancy Nasdaq 100 Covered Call ETF (ASX:QYLD), which seeks to enhance income by writing call options. In doing so, the potential capital upside is also limited.

Gleeson said there was little correlation to these tech stocks and the ASX200, of which financials (the banks) account for 30 per cent and the miners a further 20 per cent.

So there’s a natural hedge between high-octane Nasdaq growth and the favourite ASX plodders.

But if punters can find better value with the Asian AI plays or providers of power infrastructure to feed the data centre boom, then all the better.

Other AI-related sectors of interest – and potentially better value – are robotics and cyber security.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision

Find more Tim Boreham wisdom at stockhead.com.au

Originally published as Tim Boreham: As AI surges, it’s time for investors to use their (real) brains