Market Update 4th March 2024

Analysts vs the machines

I keep hearing that analysts are high on the list of people who are going to be replaced by AI. I can tell you Innovation isn’t being written by ChatGPT just yet, but I must confess I subscribed to the $20/month souped up version, in case of emergencies. Unfortunately, since then the email I used to subscribe has been deactivated and I am locked out of the account, but they are still taking the $20. I asked ChatGPT if it could put me in touch with the help-desk but it said it didn’t think there was one (there is). I asked for my $20 back and it clammed up entirely.

I guess the future will have to wait, but I do like to think I’m a trier at the very least, and we are of course seeing more and more AI related positions across our funds. Some funds are able to simply buy Nvidia, but there are many issues with this given the combination of its size and rapid growth. Most obviously it is now nearly 5% of the index, so any meaningful overweight position in a US fund is potentially running into the UCITS 10% rule, and the size of the overweight is being reduced over time.

Some funds have to be more creative. Nvidia trades on over 30x forward earnings, and this may not fit the fund’s philosophy or investment process. I’m also old enough to remember when “don’t invest in things you don’t understand” was almost everybody’s stock picking mantra, yet here we are – AI experts everywhere you look.

One such fund is De Lisle America who we had an update from last week. Manager Richard De Lisle looks for undervalued earnings growth in mostly smaller companies. The fund has a p/e of just over 10x vs the S&P 500 which is just over 20x, and has a long-term record of outperforming the index without owning the large tech stocks. What he does very well is find stocks which have perhaps been overlooked, but are exposed to trends such as AI from different angles.

Super Micro Computer is one of these, bought by the fund last October on a p/e of around 15x, it provides data centre and storage infrastructure including liquid cooling of the data centres. AI is both data and power intensive, and cooling data centres has been an issue for some time – some of Facebook’s are near the Arctic Circle.

In its recent results for its (Q2) December quarter end, Super Micro reported revenue of $3.66bn vs $2.8bn estimated. Quarterly revenue was higher than in the whole of 2021. They increased their full year to June 2024 guidance to over $14bn from previous guidance of $10bn-£11bn. Earnings increased ahead of expectations as well – up 71% y/y to $5.59. Since buying in October, the stock is up over 3x and has significantly outperformed Nvidia over the (admittedly short) period.

I’m of course aware of potential efficiencies AI can bring to our industry and others. Number crunching is an obvious example, but even here I would say it is not always straight forward. I have still not been at Hawksmoor very long, and De Lisle pre-dates me being here, but we have access to the founder share class, so what numbers would the AI be crunching so early in the fund’s life? Would it have any kind of relationship with the manager as a long-term holder of the fund? What about regulation? Financial services must be one of the most heavily regulated industries in the world, technology and specifically AI is barely regulated at all.

Anyway, now that I am no longer on speaking terms with ChatGPT, I have discovered and prefer Copilot instead, for various reasons. Copilot goes up to the present day for example, so it was able to help me write up Super Micro’s recent results. Then I had another idea and asked Copilot if it could unsubscribe me from ChatGPT and ideally get my $20 back, and I promise this is true, it just wrote a weird poem about fighting with ChatGPT.

Robert Fullerton – Senior Research Analyst

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