No matter the economic circumstances, it is advisable to invest in innovative enterprises that aggressively capture market share and enhance value over time. Some investors, including our team at Alger Expense Director, opine that the fluctuations in such cycles are essentially background noise, diverting attention from the long-term perspective cherished by investors. This stands in contrast to the media’s inclination for investors to focus on transient headline-grabbing cycles such as democratic elections, central bank actions, and monetary expansions and contractions.
Innovation, which drives productivity, gross domestic product, and ultimately living standards, is the primary driver of wealth creation. There is a growing demand for cutting-edge products and services that enhance the efficiency and well-being of businesses and consumers. These innovations continue to incentivize buyers irrespective of external factors like elections or interest rate fluctuations.
Alger has navigated investments over its 60-year history through various downturns, periods of slow growth, and times of abundant and affordable capital. Reflecting on these ups and downs, two key lessons emerge:
- Research indicates that financial volatility in all its forms spurs innovation.
- Robust competitive advantages often lead to increased market share, particularly during challenging economic periods.
To generate value regardless of the economic landscape, investors should consider allocating funds to the stocks of pioneering businesses that aggressively capture market share.
Innovation Persists
Technological advancements that boost productivity have historically thrived during both favorable and unfavorable economic climates. For instance, the Global Financial Crisis spurred the growth of online advertising and smartphone usage, while the recession in the early 1990s saw a surge in personal computer use. These technologies flourished amidst adversity as they were in the early stages of adoption.
As depicted in the chart below, these specific technologies have now matured and become established. The chart also highlights more recent technologies like artificial intelligence (AI), which are currently in the early stages of exponential growth. These emerging technologies are poised to play a more significant role in consumer and business investments, evolving in diverse financial environments.
Alger Leads the Way
Artificial Intelligence Advancement
Bill Gates regards artificial intelligence as “every bit as important as the computer, the internet.” The overarching theme of AI is poised to impact businesses and investments for years to come. Alger recently engaged with a cloud service expert worth billions of dollars who emphasized the critical business implications of digital transformation and the anticipated cost-saving benefits for businesses utilizing technologies like AI, making AI solutions essential.
The adoption of AI technology is expected to persist regardless of the pace of economic expansion. Identifying participants in this trend could yield substantial returns for investors. The AI sector presents enticing opportunities outlined below.
We refer to the companies providing the infrastructure for AI services as “enablers.” Semiconductors play a vital role in the AI ecosystem by providing the necessary processing power, which is in high demand.
Consider that the level of training received by advanced AI programs, such as ChatGPT, significantly influences their intelligence. This training is doubling approximately every four months, contrasting with Moore’s Law, which accurately predicted the doubling of transistors on computer chips every two years. The exponential growth rate of AI training is staggering, akin to a six-inch plant reaching the moon in ten years if it followed the pace of AI development.
Leading chip manufacturers in the AI sector with cutting-edge technologies include Nvidia (NVDA), Marvell Technology (MRVL), and Advanced Micro Devices (AMD).
The development of innovative chip and server architectures is imperative to meet the substantial computing requirements of AI, resulting in higher power consumption per server cabinet in the vast data centers housing these systems. Schneider Electric forecasts a 30% annual increase in AI power consumption, culminating in a fourfold rise from current levels over the next five years, measured in gigawatts.
However, the heightened energy density in AI operations leading to excessive heat generation poses cooling challenges for data centers. Companies like Vertiv Holdings are addressing this issue while enhancing cost-efficiency and energy conservation.
The expansion of data centers to meet the escalating demand for AI could pose challenges in energy transmission and distribution. Grid enhancements may be necessary, presenting opportunities for utilities and businesses involved in power management and electrical services. Companies like Eaton, a global power management organization, are striving to meet the surging electricity demand, potentially rewarding shareholders with favorable returns.
Data-Driven Insights
Data serves as the fuel for AI’s advancement.
In today’s economy, data is likened to the new oil—a critical raw material for digital transformation. Organized and digitized data is essential for software functionality, particularly crucial for AI applications. Good quality data is indispensable for advanced AI capabilities. If AI is a rocket ship, data is its fuel. Software tools like advanced AI must be able to access unstructured data sources such as text messages, emails, social media, websites, and business documents.
MongoDB is a company that aids organizations in structuring and storing unstructured data in a database management system. Gartner projects a 17% annual growth in the data management market from 2023 to 2027, making this sector an attractive investment opportunity.
Preparation for All Scenarios
Alger advocates for positioning portfolios to thrive in various economic scenarios by investing in businesses poised to expand their market share. Companies supporting AI, including chip manufacturers, power management firms, and database providers, exemplify entities offering cutting-edge products and services globally. By focusing on long-term wealth creation and ignoring short-term noise, investors can prosper in both favorable and challenging economic conditions.
The business strategy at Alger is overseen by Brad Neuman. As of October 31, 2003 (Alger’s most recent reporting date), the company held positions in MongoDB, Nvidia, Marvell, Advanced Micro Devices, Schneider Electric, Vertiv, and Eaton.
While Intel’s new AI chips for PCs are anticipated to gain widespread adoption, their overall impact remains uncertain.
Moreover, though the likelihood of a crisis is uncertain, economists foresee a potential slowdown on the horizon for the U.S. economy.
