If believing in the power of tech companies to always grow was a religion, Hugh Grieves, manager of the Premier Miton US Opportunities fund, would be a prominent apostate.
A technology manager in the boom of the early 2000s, he has now grown very sceptical of tech companies and only has three in his portfolio.
With experience came the knowledge that many of these companies are over-hyped, their competitive moats are “not as solid as everyone would like to believe”, and it is very easy to overpay for them.
“Just because we can identify great companies, it doesn't mean they make great investments,” he said. “We sometimes wait a long period of time for something to happen to get valuations down to a point that allows a margin of safety. It doesn't happen very often.”
His change of heart happened after multiple market cycles, he explained.
“When you have been through enough cycles, you stop to think: Hang on, we've been here before. I know what happened last time and it wasn't pretty. Is the same thing going to happen again?”
This is particularly true when looking at artificial intelligence (AI) and the Magnificent Seven companies that have driven markets in the past couple of years. To the much-asked question of ‘Is it a bubble?’, Grieves’ answer is a loud yes.
“Many people will tell you the Magnificent Seven are all great, profitable companies, and I understand that. But look at the valuations private markets placed on companies such as ChatGPT. They are trading on tens of billions of dollars for basically no revenues. Tell me that that makes sense,” he said.
Companies are spending hundreds of billions of dollars on capex for AI, and up until 18 months ago, investors weren't really concerned about where the profits were. Now, the manager noted, they are asking more and more questions, specifically: ‘Where is the revenue, where are the profits, where are the products that are going to get everyone excited?’
This to him is a sign that “the first cracks are starting to appear and those doubts will only increase”.
One example over everything else: Nvidia is forecast to make $170bn in revenue next year – “a huge number and a hard one to get your head around”.
In the manager’s most optimistic calculations, Nvidia might capture $100bn of the expected $170bn from the four biggest spenders on AI – Amazon, Microsoft, Google and Facebook. American venture capital might contribute $10bn to $20bn.
“Who's going to buy the other $50bn? Certainly no-one in Europe, Japan or China. And so you start questioning the reality of this,” he said.
Grieves isn’t the only one in this school of thought; Julian Bishop, co-manager of the Brunner investment trust, shared similar views on Nvidia.
Here, history might be the best teacher.
Everyone remembers that the NASDAQ index peaked in March 2000 but what is often forgotten is that the market didn’t just go down from there, it went sideways for a long period of time through the summer, Grieves recalled.
“I remember everyone asking themselves: ‘Does the market go on to make a new high?’ Until finally in October, we realized it was over and everything went down.”
Today he believes we are in a similar position. “We are in the Twilight Zone of ‘will it, won't it?’, but a reality check is coming.”
As for how long the bull run in technology stocks can keep going, the manager thinks that it all just relies on confidence. “Once that starts to go, the whole edifice comes crumbling down.”
For Grieves, this generates significant problems for investors, especially those who are investing in the US market through S&P 500 index trackers. “The S&P 500 is a very different index to what it used to be,” he noted.
“In the mid-‘90s, its top 10 companies were a broad cross-section of the US market. Now, it’s half a tech fund and if those stocks are working, then it's great. But in a post-Trump world, if investors are looking for ways of investing in US companies and the US economy, then the S&P 500 is a pretty terrible way of doing it.”