This blog has been rather outspoken on the AI investment theme and the need to be involved. It wasn’t until OpenAI first became available to the general public on November 30, 2022, with the launch of ChatGPT, that we have seen almost every company linked to AI become investment gold. An easy way for our clients to get exposure to this segment of the market has been via the Nasdaq-100 index. This Index has surged by roughly 141% since that date, driven predominantly by its top ten constituents, which account for more than 50% of its total weight:
| Rank | Company | Ticker | Approximate Index Weight and Return |
| 1 | Nvidia Corp | NVDA | 12.4% – 13.2% 900%+ |
| 2 | Apple Inc. | AAPL | 11.4% – 12.4% 130%+ |
| 3 | Microsoft Corp | MSFT | 9.0% – 9.5% 115%+ |
| 4 | Amazon.com Inc | AMZN | 6.5% – 6.7% 160%+ |
| 5 | Alphabet Inc. (Class A) | GOOGL | 4.8% – 5.2% 220%+ |
| 6 | SpaceX | SPCX | 4.8% only listed 12 June 2026 |
| 7 | Alphabet Inc. (Class C) | GOOG | 4.5% 220%+ |
| 8 | Meta Platforms, Inc. | META | 3.7% – 3.9% 350%+ |
| 9 | Broadcom Inc. | AVGO | 3.7% – 4.1% 230%+ |
| 10 | Tesla, Inc. | TSLA | 3.6% – 3.7% 110%+ |
We have been very positive on what is called the Mag7 group of companies consisting of all of the above excluding SpaceX and Broadcom, and if you want to narrow them down even more, we get to the original hyperscalers namely Amazon, Microsoft and Alphabet. When we sing the praises of the AI revolution, we refer predominantly to the Mag7. Unlike the unprofitable startup companies that caused the Tech bubble to burst in 2000, these companies are massive, very profitable and have strong balance sheets. They are considered a “safe” place to invest during volatile times because of their fair valuations and almost 100% certainty of being around five years from now. With all of that said, we have to remember that the expectation for these companies to grow earnings at double digits every quarter is very high and their prices reflect that. It is a given that the returns we have seen over the last few years for these companies cannot continue, and we are entering a phase where some of them will become pedestrian performers, and others will still have some outperformance on their side.
There are, however, darker clouds on the horizon for some of the companies on the periphery of the AI boom. We have to understand that the broader definition of companies involved in the AI buildout, namely semiconductors, are not all part of the Mag7 group and not necessarily as safe when it comes to longer-term investments. One sub group called memory chips contains companies like Samsung which is up 123% over the last 12 months but down 18% over the last month; and Micron technology which is up 311% over 12 months but down 26% over the last 4 months. We can also look at a group of companies called the neocloud. There we find a company like CoreWeave which was up 73% over the first 5 months of this year, but is now down 60% from its high.
The AI cycle is going to continue for some time to come but we are at a point where the winners and losers will start to come to the fore. There are two main concerns that will dominate the success of these companies going forward:
- Can they make their enormous capital expenditure profitable? We have seen that even the Mag7 companies haven’t got enough free cash flow to satisfy their capital needs, and are turning toward the debt markets. If they can’t get a substantial return on those investments in the future, their share prices will go down a lot.
- Can they raise enough debt to satisfy their capital buildout? If the debt markets dry up or the cost of debt becomes to high, these infrastructure buildouts will stall or get scaled down which will reverberate throughout the AI trade, disappointing the shareholders, so that we will see share drawdowns, starting at the smaller companies and ultimately infecting the hyperscalers.
As an investor you have to decide where in the AI trade you want your exposure to be. It is very likely that the Mag7 or Nasdaq-100 index will provide you with lower returns than we have seen over the last five years, but they will provide you with way less risk than some of the more speculative or cyclical companies like the neocloud or memory chip companies. Investing in anything AI is going to be volatile. If the returns on the capital expenditure disappoint, or the debt dries up, the best days are behind us, but if you believe like we do that the AI phenomenon is only starting, then investing in an index like the Nasdaq-100 is one that you can just lock away and look at again five years from now.
In the environment we find ourselves in at the moment we prefer our portfolios to be a bit more diversified than just technology. Broadening out your equity investment exposure to include some world equity as well as the broader U.S. market makes a lot of sense. It is also very tempting to invest in emerging markets but as we have highlighted in a recent blog, doing that also carries some uncertainty.