This intro to the GQG Research article titled “Dotcom on Steroids” very much captures the gist of what I’ve been expressing during client review meetings when the AI topic comes up… Specifically, the areas I bolded:
“Since the 2008 financial crisis, the US technology sector has been the standout investment trade, defying the concerns of value investors over steep valuations. While many initially underestimated the business quality, growth runway, and long-term earnings power of big tech, these companies—led by visionary founders—evolved into monopolistic giants, delivering fast growth and robust profit margins. In a growth-starved, zero-interest-rate world that continuously drove capital toward secular growing compounders, this was the perfect setup for massive outperformance.
Today, we believe the sector stands at a significant inflection point, with investors seemingly making a one-way bet on the AI mania while appearing to ignore alarming fundamental issues. In our view, the momentum in these growth-oriented segments of the market—including big tech and companies tied to the AI infrastructure buildout—could reverse at any moment. As a result, we have adopted a much more cautious stance toward these investments. We anticipate the next few years for the sector will be defined by deteriorating fundamentals: lower growth, higher competition, and greater capital intensity.
“We are not perma-bears on the technology sector; in fact, we were comparatively larger buyers of Nvidia in 2023, and the stock has been among the top performers since the firm’s June 2016 inception.1 Clients regularly pushed back on our historical overweight position in the technology sector just a few years ago.
However, our views on the sector have since shifted. Given our goal of capital preservation during downturns and our natural inclination to forgo some upside possibilities in favor of maximizing potential long-term compounding, we would be remiss if we did not raise the question:
How much of your net worth do you want invested in a cyclical sector where many of the largest players appear to be exhibiting growth deceleration, free cash flow margin deterioration, and increasing competition?
It may be hard for investors to face the uncomfortable reality that the trade that worked for over a decade may be over. After all, most money managers today do not carry the scars of the dotcom era. Of the approximately 1,700 active large-cap US portfolio managers, just 4% invested through that period*. There is a difference between living through a downturn and merely reading about it.
Even the best companies can falter when valuations are stretched and expectations appear exuberant. During the dotcom crash, Microsoft and Cisco lost a third of their value in a matter of a week, and Amazon shed nearly 80% percent of its value over 12 months. Earnings revisions also tend to be a trailing indicator. For example, in December 2000, several quarters after the peak, analysts were still forecasting nearly 9% earnings growth for 2001.”
*I’m in the “4%.”
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