AFIC excited by the possibilities tech darling offers investors

Australian shares investor AFIC has bought into trillion-dollar US chipmaker Nvidia and contrary to what many might think, it sees the AI market darling as like buying old industrials.

AFIC boss Mark Freeman. Picture: Aaron Francis

Conservative investment house Australian Foundation Investment Company has taken a position in the new world of artificial intelligence by buying into the world’s hottest tech stock, US chipmaker Nvidia.

The 95-year-old Melbourne company, whose $9bn equities portfolio is dominated by “old-world” blue chip stocks such as Commonwealth Bank, BHP, Westpac and Amcor, has become increasingly interested in companies at the forefront of the technological revolution and views tech market darling Nvidia through the same lens as it would any other industrial.

AFIC chief executive Mark Freeman, whose company funds invested on behalf of more than 160,000 shareholders – and who are mostly conservative retirees – believes that Nvidia is a classic AFIC company.

AFIC made its first major foray into the world of AI by buying 2555 shares in the $US1 trillion California tech giant for a total investment of $1.623m.

Its investment in Nvidia – whose share price has rocketed almost 250 per cent in the past 12 months as it rides the wave of investor infatuation with anything AI-related – is relatively small but forms an exciting part of its burgeoning $115m portfolio of international equities.

Traditionally only an investor in the Australian sharemarket, last year its international equities portfolio was worth $89m and it has been steadily pouring more funds into the US and Europe in companies such as Home Depot, McDonald’s, PepsiCo and Starbucks.

Increasingly it has taken the plunge into tech stocks, adding Alphabet, Amazon, Appl, Netflix, Meta – and now the $US1.16 trillion ($1.75 trillion) chip behemoth Nvidia.

Nvidia’s headquarters in Santa Clara, California. Picture: Getty Images

Mr Freeman told The Australian it was always on the lookout for companies that could grow profit, and the nature of those types of growth stories in the market was changing.

The stocks AFIC would traditionally cling to has changed over the almost three decades Mr Freeman has spent in the investment industry.

“The world is changing as to what is a good company,’’ Mr Freeman said.

“What is deemed a good, solid, sound, well-run company these days – the nature of a business like that – is very different from when I first started.

“So when I first started 28 years ago there were a lot of industrials and a good, solid business was WA Newspapers. It pumped out a good dividend, was a monopoly; then you had the period with banks that were so strong and earnings were growing.

“These days if I look through our portfolio and I see which are the really robust stocks. I’d say REA Group or Carsales because they’ve got dominant market positions, generally strong balance sheets, produce good cash and have good opportunities.

“And now we are in the world of technology, and Nvidia has got a dominant position in those chips that had been used for computer games and now they are a big part of AI and you think, ‘it is a profitable business, has a high return on capital, is well run and has a strong market position’.

“So actually the analysis is of a typical AFIC stock but it just sounds different because it is technology rather than a bank or industrial stock – but still has similar principles that you look for.”

Nvidia has set the world alight with its range of high-end chips and software which is feeding and fuelling the AI revolution. Its share price is currently sitting at $US470, having doubled in the past six months and is up almost 600 per cent in the past five years.

Its in-demand chips can sell for $US40,000 each, are in short supply and has generated tens of billions of dollars of sales for the company. Last month Nvidia revealed that quarterly sales had doubled to $US13.51bn and earnings were up more than eightfold to more than $US6bn.

The tech giant’s fortunes are being driven by its AI chips that are the core infrastructure needed to build and run AI applications like OpenAI’s ChatGPT and other programs.

AFIC’s growing international portfolio still has traditional industrials such as Home Depot and Nestle, but there was also a growing exposure to tech stocks.

“Nvidia is a high-growth company with an extraordinary market position in an area of the market that is growing strongly – so why wouldn’t you have some of that?” Mr Freeman said.

“We are looking for strong market positions, strong solid returns on capital, strong balance sheets and a well-run company with good growth potential, a leadership position in the market they operate in … you apply those frameworks historically and for a long time it was the banks or other companies. You just apply that to technology and there are the same types of opportunities.”