Investor James Anderson says Big Tech software boom is fading

In short: A well known tech investor says the next phase of the AI race may reward chip and chip making equipment companies more than big software and internet firms.

What's going on

James Anderson, a former star fund manager at Baillie Gifford, says the long period where the biggest US software and internet companies dominated returns may be ending. He wrote this in an annual letter to investors in a fund he runs called Lingotto Innovation Strategy.

Anderson argues that the biggest tech firms, including Google, Meta, Amazon, and Microsoft, are now spending so much money building AI systems that it is hurting their cash flow. Cash flow is the money a business has left after it pays its bills. He said there is no obvious way back to the old pattern of lower spending and lots of spare cash.

He thinks a large share of the benefits from this spending will go to hardware suppliers. Hardware here means the physical parts needed to run AI, like chips (the tiny “brains” inside computers) and the machines used to make them. He pointed to Nvidia, Taiwan Semiconductor Manufacturing Company (TSMC), and ASML as key winners.

Morgan Stanley analysts estimate that big tech “hyperscalers” will spend about $2tn from 2024 to 2027 on data centers. Data centers are large buildings full of computers, like warehouses for computing power.

What to watch

If demand for AI chips stays tight, suppliers may be able to keep prices high, like a seller in a shop with limited stock. But if chip makers expand too fast and AI spending slows, the market could swing the other way and end up with too many chips. Anderson also said he would not rule out buying shares in Anthropic if the AI company goes public.

Source: Financial Times