This article was produced in partnership with T. Rowe Price
Pricey big-name companies continue to be the focus of interest for investors keen to lift exposure to emerging megatrends like artificial intelligence (AI) and anti-obesity drugs, according to investment consultants and researchers.
While large-cap stocks such as Nvidia and Eli Lilly have been on a tear over the past 18 months and already trade at heady valuations, the absence of near-term competition and lack of clarity on how these technologies will develop in the longer term means investors continue to pile into a handful of companies.
“You really want companies with stable earnings, solid balance sheets, brand recognition, and a proven track record of innovation and growth within that sphere,” Atchison Consultants investment analyst Mishan Dahia tells Professional Planner.
The launch of OpenAI’s ChatGPT two years ago and its rapid adoption significantly altered the investment landscape. Gains for AI-related stocks, especially mega-caps such as Nvidia, Meta, Microsoft and Alphabet have largely contributed to the global stock market rally over the last 12 months.
Similarly, the emergence of glucagon-like peptide 1 (GLP-1) medications to treat obesity and diabetes has fueled the growth in valuations for healthcare firms like Novo Nordsk and Eli Lilly.
Value Dilemma
Genium Investment Partners head of research Tim Murphy says as with any investment theme, investors have jumped on board the AI and anti-obesity drugs trends, but whether these stocks continue to represent value is a key question.
“All these underlying businesses undoubtedly have growth ahead of them, but you’ve obviously got to consider the price you’re paying for that today,” he says.
Earlier this year, global research house Morningstar highlighted that large-cap growth stocks most correlated with AI and GLP-1 drugs had risen to the point that they were generally overvalued and overextended, but that has done little to stem the tide.
Its chief US market strategist David Sekera says Wall Street – where most of these stocks are concentrated – is currently trading at a 4 per cent premium to fair value, a position that has only prevailed for about 10 per cent of the period since 2010, and indication of how fully valued the market is.
Based on the Morningstar ratings criteria, Eli Lilly is trading at a 60 per cent premium to intrinsic valuation, while Novo Nordsk is at a 40 per cent premium to fair value.
“Now is a good time for investors to actually look to take money off the table and lock in some of those profits,” Sekera says.
“While companies like Eli Lilly and Novo Nordisk fundamentally are doing very well right now and even over the next couple years, as more competition comes on the market over the medium-to-longer term, you’ll see the excess returns get competed away.”
The poster child for the AI sector, Nvidia, also trades at a 28 per cent premium to fair value, but there are some other attractively priced alternatives such as Dutch chipmaker ASML, as well as Taiwan’s TSMC.
Long Term Trends
Atchison’s Dahia says while many large cap stocks seem exorbitant when viewed from a historical basis, they appear more reasonably priced based on forward projected earnings.
“It’s hard to bucket companies that are experiencing such extreme growth, like Nvidia, with everything else. But we are also wary of putting too much future valuation on things when we can’t predict what the future will be.”
The current level of hyper-growth in AI infrastructure could last another three to four quarters, according to Morningstar.
Beyond that, some experts are betting on tech giants like Microsoft and Alphabet becoming more adept at using AI to enhance their own products to drive additional revenue and operating margin efficiencies.
The competitive landscape for GLP-1 drugs is similar, with current market leaders set to continue generating rapid growth for the next couple of years before seeing additional competition, Sekera says.
From an investment perspective, Genium’s Murphy questions whether the next beneficiaries of AI will continue to be the chip producers.
“Or will it be different companies in different industries where they can adopt AI to make their own processes more efficient? That’s probably the area we have the least understanding of,” Murphy says.
“So obviously, everyone’s bitten up the chip makers and the GLP-1 makers to date.”
