Ian Cowie: are you braced for AI apocalypse or buying into AI optimism?

Blockbuster profits averaging $10 billion (£7.4 billion) per month, hitting a record $120 billion last year, announced by  the microchip-maker NVIDIA Corp (NASDAQ:NVDA) this week failed to calm some investors’ fears that the artificial intelligence (AI) boom is a bubble that must burst. The biggest question in global stock markets today is: are you a technology bear or pessimist braced for an ‘AIpocalypse now’ - or a bull buying into ‘AIoptimism’?

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Nvidia’s share price reflects that uncertainty, being little changed immediately after the results and only 4% up on the year to date. But sales of $68.1 billion in the final quarter of its financial year to January were 73% higher than a year ago and exceeded analysts’ average forecast of $66.2 billion.

Those are extraordinary results from a business that, until a few years ago, was best-known for making the semiconductors needed to power video games. Fortunately for those of us who wouldn’t know one end of a graphics processing unit (GPU) from another, specialist investment trusts enable us to gain exposure to the growth of AI and GPUs as part of globally diversified portfolios of technology shares.

For example, Nvidia is the biggest single holding in Polar Capital Technology Ord (LSE:PCT), the £6.4 billion investment trust where the microchip-maker accounts for 10% of its net asset value (NAV). Other high-profile holdings include the software giant Microsoft Corp (NASDAQ:MSFT), the self-descriptive Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM) and the iPhone-maker Apple Inc (NASDAQ:AAPL).

That portfolio, managed by Ben Rogoff since June, 2006, and Fatima Lu since November, 2011, delivered total returns of 56% over the last year and 133% over five years, following 854% over the last decade, according to independent statisticians Morningstar. Despite such eye-stretching returns and modest ongoing charges of 0.77%, PCT shares continue to be priced 7.5% below their NAV.

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This fund will always be close to my wallet because I have been a PCT shareholder since the Noughties and transferred these shares from a paper-based broker in September, 2013, when they were trading at 43p each, allowing for a subsequent 10 for one split in 2024. They are priced at 530p at the time of writing and I believe they might have further to go.

One reason is that I am tapping this out now on a MacBook Air, having bought all my technology from Apple for the last 36 years. For much of that time, if not all of it, pessimists were sagely  predicting imminent doom for the digital sector in general and Apple in particular.

Many of them often had clever-sounding reasons for being gloomy but this simple soul has found it proved very profitable to ignore the pessimists and own the shares. Of course, the past is not necessarily a guide to the future - and perhaps it really will be different this time - but I don’t see any reason for these long-term trends to reverse.

Bear in mind that the richest man in the world could not buy a smartphone 20 years ago, because Steve Jobs, the co-founder of Apple, did not unveil the first iPhone until January 2007. Now almost everyone carries a minicomputer in their pocket.

Similarly, the search engine Google is so ubiquitous that this business has become a noun and a verb, helping to earn its owner, Alphabet Inc Class A (NASDAQ:GOOGL) a place in PCT’s top 10. AI could challenge that, which is why Alphabet has said it intends to invest between $175 billion and $185 billion in its large language model (LLM) offering, Gemini, this year.

An alternative pooled-fund approach to AI and other digital developments is Allianz Technology Trust Ord (LSE:ATT), the £2 billion investment trust. Once again, NVDA accounts for 10% of this fund’s NAV, followed by its next-biggest holdings GOOGL, MSFT and APPL.

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However, ATT - where Michael Seidenberg and Danny Su have been at the helm since November, 2016 - has higher exposure to relatively smaller technology businesses, including Micron Technology Inc (NASDAQ:MU) and KLA Corp (NASDAQ:KLAC). This portfolio delivered total returns of 34% over the last year, 88% over the last five years, and 867% over the last decade. Despite even lower costs than PCT, with ATT having ongoing charges of 0.64%, this trust is trading at an 8.6% discount to its NAV.

To return to where we began, fears for the technology sector focus on Nvidia’s reliance on a small group of big data-centre businesses  known as hyperscalers. Amazon.com Inc (NASDAQ:AMZN), Google, Meta Platforms Inc Class A (NASDAQ:META) and Microsoft have said they intend to invest a total of $660 billion this year on AI data centres.

No wonder some worry about a re-run of the dot.gone bubble which burst at the beginning of this century. But the businesses that failed in 2000 were not profitable, unlike all the companies above - including Nvidia which reported gross profit margins of 75% this week.

So, I don’t intend to sell any of my AAPL, MSFT or PCT shares and suspect the current anxiety is just another example of new technology, same old stock market worries. Or, as City cynics say, bears sound clever but bulls make money.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Apple (AAPL), Microsoft (MSFT) and Polar Capital Technology (PCT) as parr of a globally diversified portfolio of investment trusts and other shares.