At the £3.6 billion Polar Capital Technology Trust’s (LSE: PCT) annual general meeting in September, manager Ben Rogoff said, “It doesn’t feel like AI is in a bubble to us – AI is a theme that should dominate every portfolio”.
Many historic innovations greatly increased productivity, says Rogoff: horsepower by 50 times, the tractor by four times and the sewing machine by 22 times. AI has the potential to do the same: already, companies are reporting significant efficiency gains. Some 60% of workers today are employed in occupations that did not exist in 1940, he notes. “We cannot know what new opportunities are enabled by AI.”
Industry sources predict that the current $45 billion market for AI chips will grow to $400 billion by 2027, says his colleague Alastair Unwin. Yet a capital expenditure (capex) bubble is unlikely: technology capex is still modest relative to the 2.5% of US GDP that was invested in railways in the mid-1800s.
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Is AI consuming too much energy?
Sceptics argue that AI will put an intolerable burden on the electricity supply. Such warnings do not take account of increasing energy efficiency, say the Polar team. While the computing power required for AI is growing exponentially – perhaps by as much as 50% per quarter – this should slow to 25% later in the decade.
Google estimates that it could deliver seven times as much computing power with the same amount of electrical power at data centres as five years ago, says Rogoff. Academic research supports this, finding that server power intensity has improved by 16% annually since 2018, while storage power intensity has improved by 24% per year.
Nvidia claims its new range of chips is over 75% more efficient than the previous standard, and over 90% more efficient than chips in use five years ago. Similarly, Dell, which accounts for around 30% of the data-centre storage market, suggests its new suite of storage products is 82% more energy efficient than legacy solutions.
The combination of growth in computing power offset by efficiency gains leads to an estimate that from 2024-2030, demand for power from data centres could grow by 15%- 20% per year, accounting for 4%-5% of global demand for electricity by the end of the period. The investment required of electricity generators and networks is not unduly onerous.
Should you invest?
The focus on AI was a significant driver of PCT’s investment return of 41% in the year to 30 April. In the five subsequent months, progress has slowed but the net asset value was still up 7%.
Unsurprisingly, Nvidia is its largest holding at 11% of the portfolio, but AI “enablers” and “beneficiaries” also feature prominently. The top-10 holdings, which account for 53% of the portfolio, include Microsoft, Apple, Meta, Alphabet and TSMC. Inevitably, North American exposure is high at 71%.
At PCT’s main competitor, the £1.4 billion Allianz Technology Trust (LSE: ATT), the portfolio is similar, although it is more concentrated (45 holdings versus 95) and North American exposure is still higher at 91%. ATT’s performance is better over five years (152% versus 126%), but worse over three years (23% versus 28%).
Both trusts trade at an 11% discount to net asset value (NAV) and both will do well if the technology sector continues to perform. While the S&P IT sector is trading at a 12-year high in terms of absolute valuation and a 10-year high relative to the S&P 500, earnings growth should remain strong. Worldwide IT spending growth has doubled to 7.5% in 2024 and is likely to stay high.
Comparisons to the dotcom bubble are misleading: profits, cash flow and balance sheets have improved greatly and the top firms are far more entrenched. Even if the sector does no worse than mark time, it won’t take long for valuations to fall to more attractive levels.
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