Bradley Amoils

Data suggests it’s still early days for the generative AI infrastructure theme, with reasons to be confident certain high-quality companies aligned to AI’s rapid adoption will deliver earnings growth well ahead of consensus expectations, making current valuation levels highly attractive, according to a global investment manager.

The facts and evidence suggest markets are still in the “early innings” of generative AI infrastructure, says Bradley Amoils, Managing Director and Portfolio Manager of US-based Axiom Investors, which manages the Pengana Axiom International Fund, which has delivered 32.4% per annum net of fees for the 12 months to 30 November 2024 for Australian retail investors.

“A snapshot of the global server environment shows that this theme is very nascent. For example, less than 2% of the 12 million servers sold in 2023 were AI enabled.

“Nvidia is expected to sell around 450,000 AI-enabled servers in 2024, but this is a small fraction of the 12 million servers which were sold just last year.

“If we look further ahead there are suggestions AI enabled servers might account for 5.3% of servers sold in 2026, which would still fall well short of demand, and suggests we’re only at the beginning.”

Amoils said Nvidia remains well positioned in generative AI with forecast revenues continuing to impress. “How high Nvidia can go is tough to say, and we don’t like to forecast these things, but if we look at the forward revenues for the next few quarters there is no sign of this trend slowing down.

“If a chip goes into the foundry this quarter it creates revenue the next quarter, because it takes about 3-4 months to make a chip.

“A lot gets written about Nvidia’s share price, but the earnings, forward guidance and TSMC  monthly sales data have been there to back it up.”

Stocks in the shadows of Nvidia, including TSMC and Vertiv, are also proving attractive to investors, according to Amoils. “These companies are providing interesting data, and show the AI theme extends from mega cap to small cap positions.

“TSMC is a foundry partner with Nvidia and Apple is TSMC’s largest customer. AI-driven semi-conductor demand is insatiable, which is strongly benefitting TSMC.

“Vertiv partners with server manufacturers to cool AI chips, which provide a disproportionate amount of power and heat.”

Amoils said generative AI falls into a sweet spot within the ‘Four D’s’, which are the major trends currently driving the global economy, comprising Demographics, Debt, Deglobalisation, and Disruptive innovation.

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Bradley Amoils, US-based fund manager for the Pengana Axiom International Ethical Funds, says the market is often slow to price improvements in ESG ratings. “Targeting companies early in the ESG improvement cycle has proven to be more powerful for investment returns than investing in companies which are already considered ESG leaders.

“Companies which move from ‘laggard to leader’ on ESG can produce sustained outperformance.

“We find that dislocation periods are a particularly good time to target these dynamically growing companies.

“These companies that embrace positive change, improve their ESG ratings and create a better business will be among the first to benefit from the next upswing.”

Mr Amoils said some companies are either mis-rated on ESG or can make positive changes quickly. “We know that improving social and governance factors can have a rapid positive impact on companies and their performance. Improving environmental factors is also positive but this can take time.”

Mr Amoils said investment allocations will be enormously influenced by the ‘Four D’s’, which will shape markets for some time: Demographics due to the long-term predicted fall in global population; Debt, which has grown across the world; Deglobalisation, as countries seek more control over their supply chains; and Disruptive Technologies.

“Companies which can best navigate these factors while also improving their ESG will be best placed for growth.

“Embracing deglobalisation and digital disruption will offset the negative macro trends we are seeing with demographics and debt.”

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