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Bloomberg

AI Boom Leads to Exploding Valuations

00:00 We look at something like Palantir, a 500% in 12 months, the most expensive stock on the S & P 500 when you're looking at where it prices versus future sales. Does it seem vindicated to you, these sorts of valuations? There's absolutely some enthusiasm at play here. And I think there's some and I think in this earnings season, we have heard from a variety of companies, not just these mega-cap tech companies, that they're seeing early signs of success with AI. AI's helping them run more efficiently. It's writing more and more of their code, something like 50% of code. And it's also helping them hit more shots on target, particularly in marketing. But beyond that, I think when it comes to valuations, you need to on one end look at the stability and the core business operations of some of these companies is mega-cap tech companies which remain highly profitable and then also some of the upside moving forward in the AI race. And when it comes to the leading mega-cap tech companies, at least we actually think valuations aren't as overstretched because core earnings are so robust and they are actively reinvesting a lot of those profits that cash flow into the next paradigm shift. And we're already seeing some early signs of success. These picks and shovels companies, they're also digging for gold and seeing the fruits of that. Stephanie, when you were last with us in April, it was just after the sort of deep sea chaos and we discussed how the semiconductor industry in particular was in the crosshairs of the administration. A lot has changed since then. Actually, the administration has been very supportive in exporting American technology. But just on the stories we touched on tariffs on semiconductors and location tracking on chips, there's a risk premium there. Is that. Absolutely. Geopolitics remains a risk. Policy has been a headwind for the sector in recent months and particularly today. But we are seeing a shift from this administration towards a greater appreciation around what safeguarding US dominance in AI really looks like. Right. And I will add, outside of these risks around tariffs. What is really promising and quite structural is that you have seen a decline in over 90% around the cost of inference for AI, and that has to do with four factors. Hardware, the chips themselves have been getting significantly more efficient. Algorithms are getting more efficient. How much data, how many numbers they need to crunch or right sizing models. We now have mini models that we can access. And we've seen this democratization in models, particularly open source. So all of that has led to this pretty remarkable decline in the costs of AI. And I think we need to put that to one side when thinking about these risks for tariffs. We shall borrow that acronym going forward. What I've wanted to ask you for a long time. Is there an America ink trade going on here where you just say, I bet on these companies that are most likely to succeed if this American strategy pays off? I think it's a really interesting point, particularly in the context of this debate around U.S. exceptionalism, because when I look at the markets right now, I don't see so much U.S. exceptionalism, but exceptionalism from a few US companies. And that is really what is driving the markets right now. We're actually less concerned about valuations for, let's say, the Magnificent Seven and a bit more concerned about the other 493, because without that structural tailwind, when it comes to AI, it's a bit harder to see the cyclical tailwinds for the rest of the market. But when it comes to these leading tech companies, I think you do have unprecedented fundamentals and the continued dominance, particularly in tech services. Now, there's plenty for investors to consider and we still think portfolios should be diversified. But at a time like this, you maybe don't want to be diversifying away from that epicenter of innovation. Okay. So interesting that you got the acronym POD. Hard Tech is where everyone's looking at it from a startup culture, but also into these big magnificent seven, but then drip feed it down into where if you are going to diversify the sectors that are deploying it right or indeed is it more about the picks and shovels, a little bit more about the energy, It's about the infrastructure on that side of the equation that keeps you in the air spin? Absolutely. The value chain is continuing to expand. We think that infrastructure layer is huge and that is a secular story that is still in its early innings. The amount of energy that we're going to need, the investment that we're going to need in a variety of different sources and also everything that goes into those data centers themselves, the cooling equipment, the server technology and so forth. So we still think there's a significant investment case there. But what's also really interesting, particularly what we're seeing in private markets this year, is this explosion of AI applications, the kind of applications that businesses are going to need because it's not enough to give the workers strategy, but they need domain specific applications that are actually productivity enhancing and show up in the bottom line. We're seeing more and more of those come to market this year, mostly in private markets. But I think that's a trend that is worth watching and just getting going. And then they move from private markets into public markets. And we see what happened with Figma and the euphoria around that particular listing. Are you seeing more of your clients wanting to know about what IPOs to get into or indeed how to make that move from private markets into public markets? I think there's a lot of interest there as there should be. I mean, there's a lot of anticipation for a pickup in IPO activity. And I think the fundamentals and the promise and a lot of those AI startups could be the thing that really gets enthusiasm and comfort going in the market again. But I also don't think that we're going to go back to that kind of post-pandemic period. A lot of these companies have different goals beyond just being profitable companies, right? Many of the loan providers that are in private markets, they're on the race to AGI. And so there is also this appreciation that these companies can get a lot of the capital that they need in private markets. Maybe they want more control over their companies. So if you want to access that opportunity set, don't just wait for them to go public. I think you might want to look at your private market exposure and then also maybe some of those taxable opportunities that do arise this year.