Amid global supply chain shifts, rising tensions and tighter credit, US equities have displayed lacklustre performance, with divergent returns between technology and traditional sectors.
DBS is maintaining its conviction call on big tech given a compelling growth outlook, says chief investment officer (CIO) Hou Wey Fook at the bank’s 3Q2023 insights briefing.
Hou predicts the AI sector’s rally will continue due to its rapid adoption and expectations of a rate hike pause. These factors will attract more investment into the field.
“The US tech leaders have done very well this year, up 66%. Due to this, many have questioned whether ‘the bubble is ready to pop’. We remain constructive on the sector as these companies have demonstrated good visibility of future earnings growth. From a PEG (price earnings to growth ratio) perspective, their valuations are not stretched and are reasonable at 1.1 times. These companies will continue to benefit, especially with the wave of innovation and AI,” he adds.
DBS senior investment strategist Yeang Cheng Ling says these earnings are also sustainable, highlighting the big tech companies’ robust balance sheet. Apple, for instance, had recently hit a market capitalisation of US$3 trillion ($3.9 trillion) — the first company to do so — aside from sitting on net cash of about US$80 billion.
This means these companies can acquire some of their peers, especially in the growing AI industry, adds Yeang. “For the past 10 years, these five to six largest tech companies have done about 80 AI-related mergers and acquisitions. They’re strengthening their balance sheet and technological abilities.
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“On top of being able to develop their technology in-house, they also have acquired relevant earning accretive companies that enhance their existing revenue generating capabilities. This is why from a forward-looking earnings growth trajectory perspective and PEG adjusted basis, these sectors remained very attractive,” he adds.
Winning themes
AI adoption outpaces recent technologies in speed. For example, Netflix, Facebook and Instagram took 168, 40 and 12 weeks, respectively, to reach one million users. In contrast, ChatGPT accomplished this in just one week and now boasts over 100 million monthly active users.
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DBS anticipates AI’s pervasive presence in all industries, enhancing efficiency and productivity by rapidly mastering complex tasks over time.
Yeang says that although AI may seem to be in its nascent stage, some companies have successfully generated revenue from the technology. This includes companies that produce or manufacture integrated circuits that run AI applications.
There is even more unrealised potential for AI in different industries, says Yeang. Companies such as Sandvik, Caterpillar and Komatsu supply autonomous haul trucks in the mining industry. These vehicles can plan and execute their path without human intervention, allowing them to work even at night without any lighting requirements.
DBS identifies providers of semiconductor, software, cybersecurity, cloud service, and dataset owners as the four investment themes poised to become long-term beneficiaries of rapid AI adoption.
Semiconductor companies like Nvidia, AMD and Infineon offer AI computing power. Software firms like Microsoft, Oracle, and Adobe introduce AI-based tools like Firefly, an art generator enabling content creation and alteration through text prompts.
AI adoption favours cybersecurity companies like Palo Alto Networks, Crowdstrike, and Fortinet, using the technology to detect and respond to threats swiftly. Concurrently, cloud computing firms like Amazon, IBM and Salesforce integrate predictive tech into their offerings, providing AI platforms and tools to users.
The last investment theme for AI adoption is dataset owners. Companies with proprietary data sets will be big winners of AI as the technology thrives on data, says Hou. “Data is the new oil. Players that come to mind straightaway would be Google and Amazon, leveraging on search and e-commerce.”
Hou believes that companies like Tesla are capitalising on this trend. When he is on the road, for example, sensors from his Tesla collect data about his driving pattern, which the company analyses. “Over time, the car can go into full self-drive mode. Elon Musk has always been optimistic about perfecting autonomous driving, and autonomy will be the main driver of the Tesla brand in the future. Data set owners are the big champion winners of AI.”
