The AI Ecosystem Play: It's Not Just About the Chips

CR : Hello and welcome to Silicon Valley Bitesize, an update on the tech sector from the Allianz Technology Trust. I'm Cherry Reynard, and with me today is Mike Seidenberg, manager on the Trust. We're going to be looking at the recent results season and what it's telling us about the state of play across the technology sector. So welcome, Mike.

MS: Nice to see you.

CR: Now, markets have been diversifying since the start of the year, moving away from the mega cap technology and into Europe and emerging markets and even the UK. I'm wondering if that diversification trade has also been seen in technology, with markets starting to look beyond, say, AI to other parts of their kind of technology complex.

MS: Yeah, it's a great question. If I think about year to date for the Trust and just when I happen, not surprisingly, to have attribution in front of me, it definitely feels like some of the mega caps have been sources of funds, specifically if you think about a company like Apple, which has just had just such a tremendous, multi-decade run, right? So let's take nothing away from Apple. But we have seen some movement to some of these, what I would call more large cap, big cap ideas across technology.

And look, I would also tell you that this year has been one for the ages. I mean, to experience something like we saw in the early April timeframe around proposed tariffs and just what it did to technology stocks for a period of time, coupled with nice Q2 results. So, I mean, in my career, I can't recall a year really like this year, but I do feel like you're seeing a movement towards just some different names that we haven't seen over the past few years.

Look, I'd also caution investors to remember some of these secular themes, if you take something like artificial intelligence, right? And you do have such a dominant company in the likes of an Nvidia. And we own a lot of names around the periphery that kind of feed into that thesis. I wouldn't discount all the mega caps is basically what I'm saying, but I think you have to pick and choose kind of where you play. I don't feel like all of them are created equal in this particular environment right now.

CR: And I mean, is there anything you'd highlight as having sort of bubbled to the surface of their certain sectors, which have seen an improvement?

MS: Yeah, I mean, I think just as I just alluded to with respect to artificial intelligence, look, the entire ecosystem is doing extremely well. And one of the things we pride ourselves on is really thinking about kind of first and second derivatives of a given theme. And you see that manifest itself throughout the history of the trust, whether that's movement to client server, many moons ago, and currently just thinking about things like artificial intelligence and how exactly do we potentially invest in that for our shareholders?

So it's not just thinking in terms of wanting to own just that, the particular chip companies, but it's thinking about data canters that are being built and who builds the connectors and who builds the white boxes and just going just back along that food chain and really providing ourselves with the best opportunity for our investors to be able to monetise it. So that's something that I think is very much front and present.

I mean, look, I've said this a lot on these podcasts, but things are gonna zig and zag. Rarely have I seen stocks, a sector go up in a straight line. Rarely have I seen a stock go up at a straight line. So you do your modelling, you think about the opportunity and you try to choose a time period, usually two to three years out and really kind of shoot for that as the potential valuation, or sorry, not valuation, wrong. Just think of that in terms of what's the opportunity set.

CR: Yeah, absolutely. And what, I mean, looking at the sort of quarter (Q2) as a whole, what's been the impact for the trust in terms of that diversification? You know, it's performance versus a benchmark.

MS: Yeah, I mean, you know, but here again, you know, our job is to, you know, for our investors is to provide returns and we're, you know, we are, you know, measured against a benchmark. Look, we're ahead of the benchmark. I often say, you know, to myself, that could change tomorrow. So I don't, you know, I really think about what do we need to do going forward for our shareholders?

But, you know, thus far, if I just look at the names that have contributed, you know, over the past 12 months and year to date, it is some of those, there are a number of companies that probably aren't, you know, household names. And that's something that our shareholders and those people that have held the trust for a period of time, you know, know that that's something we do. Really, we really try to focus. Our process really lends itself to identification of these mid-cap, large-cap names that hopefully can drive performance.

So, I think in terms of, you know, just making sure that we have diversification for our shareholders. I could throw a few names out there, just, you know, that don't mean anything necessarily. But, whether it's a company like, CloudFlare, which is just a super innovative company that we've been an investor in for a while, that, that's really, really taking their product suite to the next level, vis-a-vis some new products and the integration of artificial intelligence. You know, that one kind of jumps out.

You know, it could be something as kind of mundane as a company like Amphenol, which, makes a lot of the connectors inside data centres. And by the way, they're building lots of data centres, and this is just a world-class company with respect to the way management runs it and instills a culture of ownership and of really pushing their managers to really expand product lines. You know, those are two that kind of jump out. They probably, you know, everyone on this podcast is going to basically have no idea what I was talking about in all likelihood. But, you know, just interesting businesses with really good management and good business models.

CR: Yeah, absolutely. I mean, something that stood out looking at the kind of NASDAQ's top performers for the year to date was some of the cybersecurity names, which seem to have been sort of, or they've participated in the general kind of excitement around defence spending. Now, that's been a key area for the trust in the past. Have you sort of benefited from that? Have you seen a sort of change in their earnings streams?

MS: Yeah, I mean, so cybersecurity has been really a key theme for the trust for, you know, I mean, at least the last decade. And the players on the field changed, but the overall theme really hasn't decreased for us. There is a high rate of change in cybersecurity. So it really speaks to thinking about active management and how do you make sure that you own the leaders and not the laggards.

But here again, you know, taking a glance, you know, there's been just really nice performance by some of these next generation leaders in cybersecurity. And look, cybersecurity is probably, you know, the best neighbourhood in technology from a long-term perspective, given that it is a necessary spin in the world we live in and will continue to be so and will be in the likes of, you know, artificial intelligence as well. There'll be a cybersecurity tax there for most of the workloads that'll be produced. So, you know, it's been a nice sector for us.

You know, as I alluded to, I think you really need to think about who the players are on the field. Recently, one of our larger positions in the trust, CyberArk, there was a proposed announcement vis-a-vis Palo Alto Networks to acquire them. I'm actually, I'm glad from a stock perspective, I'm a little sad from a business perspective in that, you know, it's been a long-term holding for us and I just love the way they run their business. Now they're going to be part of someone else, which is a great outcome for the management team, for shareholders, et cetera.

But, you know, that's one less company I have, you know, in my repertoire of investment ideas. And there'll be others, but, you know, it's worth noting that we are seeing some early days of potential M&A. And here again, just to be clear, it's a proposed acquisition. It hasn't closed. In all likelihood, it will close. But, you know, that's something that happened to the trust fairly recently. And like I said, I'm excited for the team. They've worked so hard over the past, you know, heck, I've known them for 15 years now.

CR: Yeah, absolutely. I wonder if there's anything else that you've sort of mined from the recent results season. I mean, for example, tariffs. I saw Apple took a big hit on, you know, a billion dollar hit on tariffs. I mean, has there been any kind of more news coming to light around that sort of thing?

MS: Yeah, you're starting to hear more about it. You know, look, I think luckily for a lot of the tech companies, it's not as big a deal. I got an email yesterday from a clothing company that was reaching out to people that buy their clothing, talking about tariffs and how they're going to go ahead and absorb them, but they won't be able to absorb them forever. I think it runs the gamut with respect to, you know, with respect to what we've seen. And by the way, it's worth noting, a lot of the tariffs haven't been enacted. So we'll see once that occurs.

But I think for the most part, there'll be some sharing of the tariff vis-a-vis the company and potentially some pass on to the customers, depending on what business you're in. You know, for the most part, I think most investors have gotten used to this will be the reality going forward with the current administration. And like a lot of things, you know, the worry is worse than the reality in a lot of ways. And I think we've seen that for the most part as going down the path, but it's definitely something we have to consider. And depending on the sector, it could be a bigger factor for some sectors compared to others, for sure.

CR: Yeah, absolutely. And then just finally, Mike, looking forward into the next quarter, I mean, is there anything that you're specifically looking out for? Any things that you think are really going to shape markets in the tech sector?

MS: Yeah, I mean, so for the most part, you know, the current quarter, which is where we're just now wrapping up Q2 for most companies. In fact, next week, there'll be a number of reports for off-quarter companies around their, you know, counter Q2. I think for the most part, results have been pretty solid.

You know, the one thing I've noticed this year is there is a pretty high bar for not having, you know, not having guidance that's good enough. It appears in the technology sector that that's something that's really being penalised and that we've seen some fairly violent moves in stocks where the guidance wasn't good enough. But I think all in all, I mean, I think the environment for buying and spending remains a healthy one.

You know, I think for, as we move to the back half of the year, you know, which is always a funny thing to say because we won't get those results till, you know, that Q4 results until 26. But I think that people are hoping for a good second half spending environment. And that's something that'll probably, you know, really kind of drive the trajectory of stocks.

You know, it's TBD. I mean, for the most part, you know, you're not hearing about businesses really struggle to move sales cycles through their sales process. But, you know, I often remind myself, the third quarter is a tough quarter to the extent that there, you know, a lot of people take holidays. You know, I jokingly say that Europe goes away for like at least a month. You know, so it is one of the trickier quarters. But all in all, I feel good.

Look, the thing I feel best about is the companies we're investing create value. I was having a discussion with another investor and we were talking about artificial intelligence and what it means to the companies that are buying the products and solutions that are integrating, integrating artificial intelligence. And the bottom line is that, you know, they're buying things that create value, i.e. make their employees more efficient, you know, help them sell more things, have better customer service, right? There's three key tenants of why people buy technology.

You know, I feel like, I feel like the sector that I invest in and that our shareholders benefit from is one where the products really create value. And here again, it doesn't mean that things aren't going to get overheated or, you know, whatever. There'll be gyrations, but net, net technology is just so additive to most companies that spend on it. And therefore, you know, it's, it is, those are budgetary dollars that tend to get spent. And that's, you know, and I'm just fortunate just to have that as the sector where I've chosen to kind of, you know, make my career. So, you know, I remain pretty optimistic with respect to the long-term, you know, long-term outlook for technology spending.

CR: Brilliant. Okay. That's an optimistic note on which to end. So thank you so much, Mike. Always good to hear your views. And thank you to our listeners for tuning in. You can find out more about the Trust at the website, allianztechnologytrust.com. Until next time.