Overlooked and unloved: Opportunities beyond technology and AI

Produced in partnership with Orbis Investments.

Orbis Investments head of IT and healthcare research, Povilas Dapkevicius, is feeling uncomfortable.

For the past three years, global equities have surged around 22 per cent per annum, driven higher by mega-cap technology stocks and the artificial intelligence (AI) boom.

The June initial public offer of SpaceX, which finished its first day of trading with a historic market valuation of US$2.2 trillion ($3.11 trillion), is another sign that investors are feeling optimistic.

After 20 years of analysing companies, the last 16 years spent at Orbis Investments, Dapkevicius is cognisant that when investors are this excited about one part of the market, the high expectations embedded in the shares can potentially lead to future underperformance.

“We don’t think that AI is a bubble that must end badly but nor are we of the view that it’s all upside and there won’t be setbacks,” he tells Professional Planner.

As contrarian investors, Orbis Investments is usually “uneasy” when others are exuberant, but AI is a “monster trend” unlike anything the world has seen before and Orbis isn’t about being contrary for the sake of it, Dapkevicius says.

“There is a distinction between being contrary and being contrarian,” he says.

“If you’re contrary, you’re always taking the opposite position of others but that’s not necessarily good in investing because you also need to be right. You can’t just be different – you’ve got to be different and right.”

Dapkevicius co-leads Orbis Investments’ London-based global investment team. He is directly responsible for the team’s research in the information technology and healthcare sectors. 

The manager was a relatively early investor in AI-related companies, but Dapkevicius explains that Orbis is not a thematic investor.

Orbis’ views are a result of its fundamental, bottom-up stock picking process.

“We take a first principles approach to understanding individual companies and the industries they operate in to form a well calibrated model of reality, which we can then compare to what the market is saying and look for mispricings,” Dapkevicius says.

“Sometimes, our conclusion is that the market is not excited enough, which was our position on AI a couple of years ago when we established some of our AI positions but at this point, we think the risk and reward appears more balanced.”

“We look at the upside versus the downside, and we believe the skew on AI-exposed stocks was more favourable a couple of years ago than it is today because these stocks are up a lot. We’ve eased some of our AI-related positions and we’re being really selective.”

When analysing stocks, Orbis spends just as much time thinking about what can go wrong as it does what can go right. In the tech and AI space, there are a number of scenarios that could play out, according to Dapkevicius.

“The pace at which this technology is being adopted is incredibly fast, and companies are reaching revenue milestones that previously took decades to reach,” he says.

“AI models are highly capable and useful, and companies will pay a lot of money for their employees to use them, and top tier, agentic capabilities are priced per token, so the more companies consume, the more they pay.”

“If the industry moves in a way that requires even more infrastructure and semiconductors, it could be painful for investors who are underweight AI companies, but if there is some sort of unexpected pullback or there’s a breakthrough that enables the models to produce the same amount of intelligence at a fraction of the computing power, all of a sudden the shortage of compute could resolve sooner than the market currently expects.”

“If something like that were to happen, the AI trade could come off the rails in a big way.”

“That’s not our central case, but investors would be remiss not to think about the different scenarios that could play out in the future.”

No such thing as a slam dunk

No matter how much investing in AI appears to be a slam dunk, there is no such thing as an “easy decision” and seasoned investors understand that because anyone who has been around for any meaningful amount of time has made mistakes, Dapkevicius says, citing one of his favourite books, Engines That Move Markets by professional investor and academic, Alasdair Nairm.

The crux of that book, which examines every major industrial and technological advancement in history, including the printing press, railroads, electricity and the internet, is that it’s really hard to pick winners at the time.

“Even if you correctly identify a technology as a big deal and it achieves mass adoption over time, it’s harder than it seems to pick the ultimate winners and we’re seeing that play out right now,” Dapkevicius says, pointing to the sudden ascension of Anthropic, while some other AI labs are falling out of the frontier model race.

Underplayed or overhyped

If AI lies at the bullish end of the investor sentiment spectrum, healthcare lies at the other end.

For the past couple of years, the sector has been out of favour, adversely impacted by poor vaccine sales and policy uncertainty in the US.

In Australia, healthcare stocks are trading at multi-year lows, making the sector the worst performing sector of the past 12 months.

For Dapkevicius, who leads Orbis Investments’ healthcare team in addition to information technology, the healthcare opportunity set is “rich”.

He describes the negativity and general lack of excitement about the sector as a “gift” because there are attractive companies that represent better value.

“Company after company, we’re seeing very good opportunities in healthcare,” Dapkevicius says.

“There are companies with excellent management teams that have technical expertise and capital allocation skills. They have differentiated drugs already in the market and a good pipeline that should turn into drugs in the fullness of time.”

“These companies don’t have to cure all diseases and change the world to do well, they just need to make a difference in their areas of focus and help patients achieve a higher quality of life,” he says, contrasting healthcare companies to AI companies, which are broadly expected to change the world “quite dramatically”.   

While Orbis Investments is bullish on healthcare, in particular biotech, it’s a view that has been organically formed from its fundamental valuation process.

“There are a lot of underrated developments in healthcare, which most investors are not spending their days thinking about, but we have analysts looking at these areas,” Dapkevicius says.

“We look at individual companies and their competitive position in the market, and often times we realise that a certain theme is underplayed or overhyped or maybe companies aren’t as well positioned to capture a theme even if it plays out.”

“When investors have very high expectations for certain companies or sectors, we proceed with caution and look for areas of the market where the lack of investor excitement is creating more attractive investment opportunities.”