Transformative impact of AI on technology and the economy

Tony Wang:  Valuations do look very reasonable

Jennifer Martin: Big tech valuations remain reasonable on a growth-adjusted basis. How do you distinguish between companies that can still compound and those that appear too expensive to sustain future returns?

Tony Wang: Yeah, well, so I think that, you know, valuations do look very reasonable, first of all. So I think that, you know, you look at Nvidia 25 times, Meta 14 times, Google has gone from 15 to 25, but still very reasonable. And relative to the growth, it's actually gotten cheaper over the last year. So to me, I think about it as more like the durability of the growth. And so these large cap tech companies have like tremendous scale to deploy AI. And you've also seen like AI's been augmenting their growth, which is also like, I think helps with the terminal value of these businesses. So to me, I think they look very reasonable, especially relative to the growth.

Dom Rizzo: Look, my favorite metric to use for this is just a good old-fashioned Peter Lynch PEG ratio analysis.

Take a look at the MAG 7 PE and the MAG 7 earnings growth rate and take a look at the S&P 493, the non-MAG 7 PE and their growth rate.

And you'll find that when you adjust for the rapid earnings growth of the MAG 7, they're actually cheaper than the rest of the market.

And so as long as we're in that zone, I think that many of these stocks, particularly in big tech, particularly the large semiconductor companies as well, remain very reasonably valued.

Tony Wang: The space race for AI is actually going to multiple moons

Jennifer Martin: Can you both kind of highlight a little bit of your thinking of the outlook for tech? Can tech continue to lead the market?

Tony Wang: Yes, so my outlook is that tech is set up really well. I mean, it's been amazing that we've had kind of 30, 50% up years over the last three years, which is incredible. But I still think that the innovation curve is still early here. And AI is going to be going to supercharge the economy. I believe in this productivity boost increase idea. I think it's inevitable. I like to invest in inevitabilities. But I think it just depends on where's the economic value going to accrue to. And I think it's going to go to part of the system, the componentry. So, I think semi-cap, DRAM, HDDs, SSDs are going to see nice appreciation from here. I still think that the mainstay of the MAG7, they'll still continue to compound nicely. And then I do think software does look a little challenge if you're an expensive kind of late stage software and you're decelerating, I think these LLMs are really going to put a lot of pressure on. And then kind of the Accenture is kind of an interesting battleground stock here because they reoriented themselves to be like a Palantir and become going from AI loser to AI winner. So I think there'll definitely be some changes in terms of leadership. So it keeps things interesting.

Dom Rizzo: I think everybody wants there to be change in leadership of the market, right? Everyone calls small-cap, mid-cap, international. And the reality is, I personally think, and look, I run a global tech strategy. I have great names all over the world. I'm happy, international was better performing than the US this year. But these companies grow so rapidly, are so well-positioned fundamentally, have the benefit of addressing billions of people. Right now, competitive intensity is increasing between them, which is resulting in a huge hardware build-out. And then the question is, when is that battalion handoff from the hardware to the rest of the ecosystem? When are we going to go from hardware has all the power back to a world where software and internet have the power? And like I said earlier, I think it's a five-year cycle. Let's see how I feel next year. But we just finished year three. And so that economic value, where does it accrue? Potentially, it's hardware for longer. Potentially, it's a transition. But that's the thing that you and I probably spend the most amount of time debating, thinking about, changing our minds about, going back and forth on it. Because this is the fundamental question for every technology investor in the world today.

Tony Wang: And I think you were alluding to this earlier, but it's not a zero-sum game, and what's amazing is that, I think that the space race for AI is actually going to multiple moons, and it's not just one pond, but you see what Anthropic is doing with Claude, right? They're focusing on coding. Open AI is more enterprise, and so I think it's going to be… Interestingly, TAM expansion, just like semis. I remember we'd always talk, there's always a debate of who's going to win, Nvidia or AMD or Nvidia and Brocka. Well, they kind of all won. All their stock, they're more surfing the same wave, borrow your term earlier, of this cycle. So I think net-net, it is still TAM expansionary.