With some tech stocks – especially in software – at their lowest valuations in 30 years, it might be the best time in a generation to consider buying. Then again, it might be the start of a monumental collapse.
It’s hard to know which. But I think the situation is very different from one company to another and there are some key things investors can look for to try and find potential generational opportunities.
Disruption
Software companies have a few potential defences against the threat of AI disruption. But my strong sense is some of these are likely to be more effective than others.
Vertically integrated businesses are likely to be hard to disrupt. Companies that produce physical hardware have something that AI agents won’t be able to replace in the near future.
Equally, firms that operate in regulated industries are going to be more resilient. Getting the relevant licenses and permits is going to be hard – if not impossible – for new AI start-ups.
By contrast, switching costs might well come under pressure. Training staff on a new system is a lot of work, but it doesn’t matter as much if a firm is going to replace them with AI agents.
Likewise, companies launching their own AI products probably won’t offer much protection. It might stop customers leaving, but more competition will make it harder to increase prices.
What all of this means will vary from one company to another. But investors looking at tech stocks need to be clear about a firm’s long-term prospects in an AI world.
Hiding in plain sight
Apple (NASDAQ:AAPL) has been relatively quiet in the AI movement. But it might have been pursuing a very smart strategy by staying away from the huge costs others have been incurring.
The firm hasn’t been competing in the battle for LLM supremacy. But it might not need to – it doesn’t have a search engine, but that hasn’t stopped it from making money.
Apple has used its market-leading position to extract fees from Google in exchange for prominent positioning on the iPhone. And my sense is that something similar is going to happen with AI.
If this is right, Apple is in an incredibly strong position without having to spend like some other companies are. That makes it very attractive in terms of cash flows.
The biggest threat to this position, in my view, isn’t AI. It’s antitrust – and this is likely to be something that moves in and out of focus over time, so investors need to be aware of it.
Importantly, though, the foundation of Apple’s strength is its hardware – specifically, the iPhone. And this is something that isn’t likely to be displaced by AI at any time in the near future.
Generational opportunities
Unlike some other tech stocks, Apple shares aren’t trading at an unusually low multiple. In fact, the stock has been relatively resilient while others have reached record lows.
That, however, is because it’s in a much stronger position than some of its rivals. And that’s why investors might consider buying it, even at today’s prices.
