AI: Which Player Will be in the Lead?
Leading players such as Nvidia and cloud giants Microsoft (Azure), Amazon (AWS) and Alphabet (GCP) are the main proponents of generative AI. However, long-term success will depend on the new products that are launched for businesses and consumers, such as Microsoft's Co-Pilot and Meta's new advertising tools. In terms of investments in artificial intelligence, we believe that the risk/reward ratio is better for Microsoft than for Nvidia. The AI hype has resulted in buyers switching to Nvidia's products on a massive scale. The availability of components may have a negative impact on the production of high bandwidth memory (HBM). We do not believe that the production rate is sustainable.
Nvidia's zenith?
Nvidia currently enjoys a leading position thanks to its pioneering work in the development of AI-focussed hardware. However, its position is not invulnerable. There is a potential downside risk if consumer demand for generative AI solutions does not meet the optimistic forecasts of hyperscalers (large cloud service providers that can offer enterprise-level services such as computing and storage). Nvidia is in fierce competition with Advances Micro Devices (AMD) and should also pay attention to hyperscalers' own chip designs, which are more cost-effective for specialised AI tasks. This period could well represent the zenith of Nvidia's market share.
As far as the gaming sector is concerned, the industry is benefitting from a favourable demographic structure; the average gamer is in their mid-30s and therefore significantly younger than consumers of more traditional forms of entertainment such as television. Although the video games industry generates less money on an hourly basis, it often generates content for advertisers that is just as exciting as live sport. However, market sentiment has deteriorated following the reopening after the coronavirus pandemic, offering potentially undervalued investment opportunities that contradict the prevailing view that the sector's growth has reached a plateau.
The growth of AI will continue to go hand in hand with developments in machine learning algorithms, data analytics, cloud computing and specialised hardware. The enthusiasm is already reflected in share prices: the "Magnificent Seven" have risen by more than 50 % year-on-year. At the same time, we have seen investors selling companies with no direct connection to generative AI in order to finance the purchase of generative AI companies, which has led to significant market dislocations in this sector and opened up interesting investment opportunities. In line with our contrarian approach, we have therefore sold part of our exposure to generative AI companies that we currently consider fairly valued, such as Adobe and CRM, to finance the purchase of Ericsson and Nokia, which are currently under pressure. Both companies have stable and high-margin IP portfolios that justify almost their entire enterprise value. This means that currently the mobile sector, which is likely to stabilise and recover sometime next year, is available at a low valuation of 3-4x EBIT.