The AI Boom Isn’t Peaking — Here’s Where Smart Money Is Going

Joining us now, Saverio Papagno portfolio manager for the North Square. Growth opportunities ETF ticker NSIG Saverio. Great to have you. It's a pleasure to be here Caroline. So let's get right into it. Who is making the most money from the AI boom right now? I would say right now it's certainly the, semiconductors companies today too. So to produce intelligence, you need very, very expensive hardware. Very expensive logic and then widgets and, these products also, have a certain obsolescence. So they will need to be refreshed as a result. At the moment, the companies who are producing the most cash, but certainly, the semiconductors companies. But as we think about who will ultimately win and make the most money from AI. Do you think investors are actually giving big tech too much credit for simply spending this enormous amount of money on it? No, I think it's, I think the market is understanding these are necessary. And this is a strategic investment. In my view, they're not discretionary. And, what the hyperscalers are trying to achieve, I believe, is becoming the layer through which enterprises will consume intelligence in the future. So it's, it's a very strategic goal that requires a lot of investment. I believe in the in the AI area, you will want to own, the infrastructure. The infrastructure will be one of the elements around which, you can build a moat. So I think, the market rightly understands the importance of these investments. So your ETF, this is an ETF spotlight. Your fund is NSIG the North Square Growth Opportunities ETF. Two of your biggest holdings are Alphabet and Microsoft there. You know Alphabet's your second largest holding Microsoft is also in your top five. What separates an alphabet or a Microsoft from the AI spenders that could ultimately struggle to earn an adequate return? Well, as I said, I believe they are, you're trying to to to be game and to become an integrated players where effectively they have the infrastructure layers in the application layer. And so and therefore becoming the platform for which, corporates in the future will consume intelligence. So this type of goal requires large investments. And, and I believe this is what differentiates property Alphabet and Microsoft from other companies where it's not clear, let's say, how they will profit from from this from this type of spending. Who are you worried about? I'm worried about those companies which are simply, reselling intelligence, as I see. So they're basically, repackaging intelligence that, the customers does not know yet how to access. I think these those companies are the ones who are more at risk, in the AI area, because effectively, effectively, they they will not have something around which to build the moat, a competitive moat. So do you have any names that would not appear in your Growth Opportunities ETF? Well, I mean, you can certainly by looking at the holding list, you can, you can, you can easily spot the name which are not there. But again, I would not frame it to William and and I would not frame it as a sector, that, you know, semiconductors versus software. I think our view is much more nuanced. And again, we are we are much more cautious on those names were effectively their secret reselling intelligence as I said. So, and, and to work through a software interface simply and we like, those need particularly those software needs that have, something around, which they can build a moat. So whether it's an infrastructure, whether it's proprietary data, whether it's a system or records, companies like Deere, for example, like Cloudflare, which are, in our ETF, those are company which, we see as better positioned to weather, this kind of environment. Let's dig into software a little bit. Do you think that ultimately I will make companies, software companies more or less valuable? And how do you tell the difference between a software company that I make stronger and one that I could eventually replace? So as I said before, I think it's a it's a great question because I believe, yeah, I will increase dispersion within within many sectors, but particularly within software. And as I said before, we want our own software name, which have one of these, one of these features. So infrastructure, critical infrastructure, the proprietary data system of records. So something that cannot be replaced, easily, by the customer. Conversely, we are much more cautious on those companies which are simply repackaging intelligence that the customer maybe doesn't know how to access now. But in the future, with the new tools available, which would be much more easily, accessible. So I believe the software is, we're going to see a lot of dispersion in software. I mean, arguably, as already happened to some extent, for example, you see the relative performance, inside the sector, the dispersion has been huge. But I think this is something which is which is due to continue, as the market will slowly realize the difference between these two types of software companies. Okay. Time for a quick break. Today's video is brought to you by upside. One thing I've learned over the years is that little financial habits can add up. Whether it's earning credit card points, using loyalty programs, or finding ways to get a little more out of everyday spending. I appreciate anything that simple and easy to incorporate into my routine. That's why I recently downloaded upside. The idea is straightforward. Before you fill up your tank, grab groceries, or head out to dinner, you open the app, claim an offer, pay with your card like you normally would, and then get cash back quickly. 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Because obviously, there's been a quite significant correction in the summer, but during the month of July, where, the market was questioning the sustainability of this level of spending, I mean, I don't want to necessarily own the peak, because I think it could be to some extent could be a filter exercise. But what I think the market is probably underestimating is the fact that we're not building this huge infrastructure. The spend was close to 1 trillion, this year from the hyperscalers will surpass one tree the next year. If you just said probably $1.3 trillion will be spent, next year. But once, once we will build this huge, infrastructure, these infrastructure will need to be be refreshed periodically because logic becomes obsolete. High bandwidth memory becomes obsolete. And so the refreshment cycle, the replacement cycle will, will trigger a demand, which I think the market is underestimating at the moment. I believe the market is too much focused on, finding the peak of the spending, but I believe the spending would be much more durable that the market, is appreciating right now. Okay. Shouldn't be a surprise if you look at your holdings that you like chips because Nvidia is more than 14% of the fund. You also own Broadcom, micron and AMD. If I could own just one of those for the next few years, which name would you choose? Look, I would be here, against consensus. Consensus is very, very strong on memory chips, but I quite like them here because, to be honest with you, when I see micron at six times earnings for basically I think seven three, four times earnings. So the market is pricing a return to loss making which I do not see and I do not see a path. And I do not see a scenario where these companies, are gaming loss making, in the near future. In fact, I would argue, to go back to the argument about the replacement, the about the refreshment infrastructure when you replace the accelerator, you also have to replace the HDMI bandwidth memory, that goes with it. And so this project become obsolete, way before they physically mount for the usage. And so, and so I believe whatever scenario I can, I can draw, I struggled to see one where these companies become lost, making I believe eventually, eventually the multiple will be replaced. It will be reprised, and we will see something similar to what we have seen in the past. For example, with the foundries. I mean, look at TSMC five years ago. Was taking a very different multiples. So I believe we could see a similar, rerating also in memory stocks. And I know this is very, very much against consensus at the moment, but I'm pretty convinced about. A lot of your holdings are stocks that investors already own through the S&P 500 or the Nasdaq. What am I getting from NSIG that I don't already have an a broad index fund. So, we think, again, we think in this environment probably, you know, when they have a broad, indiscriminate exposure. So, you want to really boost up being inside the sector. So what they're getting is, is effectively stock being product where, inside each sector, we, we pick what we believe, will be the winners, of these, of these eight, and again, that doesn't mean that we are excluding large corporates just because they are in the index. You know, we like them. Well, we're not shy to, we need to, to weigh them in a significant way. It means that we're really trying to, to isolate the stock picking element and of course, while being investing. So we don't want to have a negative drift because the market in the long run, in the long term keeps going up. But we're really trying to, to focus on the stock picking inside the sectors. Yes. And so therefore I would say that that's what they're getting. They're getting them. PM. So, Of the stocks. So just quickly, what gets a company into the Growth Opportunities ETF? Because I see names like Tesla and Eli Lilly also in there. Right. So in general we like to to buy companies that have the defendable, competitive moat, and we believe if you're disciplined enough, if you're patient enough to buy them at the right moment, at the right price, that's, that's already, quite good. But, we believe this is not enough. And what we are also trying to do with this product is effectively, trying to find the competitive inflection point for some needs before it's fully recognized by the market. We believe, because I is introducing a significant element of disruption in the market. The, valuation framework of many stocks can become obsolete very, very quickly. Again, memory stock is a clear example of that. And so we believe if you can spot the inflection point, the competitive inflection point before it is fully priced by the market, I believe you can achieve very results. And that's what we're trying to do. With these products. Okay. What's the most misunderstood holding in your fund? I would say probably micro, as I said before. And if you look at the, the multiple. So certainly the one of the most misunderstood, it's probably the one that comes to my mind at the moment. Which holding would you least want to sell today? I certainly I would say in media, I wouldn't want to sell it. Absolutely not. There's so much going on. I mean, also developing an open and open source model, which I believe need to be very important in the future, because at some point, I believe the large organizations, whether it's corporates or governments alike, we want to control we want to own more and more. Okay. Yeah. In fact, I believe I'm trolling, strongly convinced that I it's a, it's a means of production. It's going to be a medium production, very important work in the future. And so large organization will have a strong incentive to own it rather than renting. And in this context, I believe open source model will play a very crucial role. So and the idea is one American company who's developing this model. And so I believe it's one more reason to not not to service. Okay. But not just I in here because I see I mean, I guess everything has some tie to AI, but not just tech stocks in here because I see caterpillar, TJX, Starbucks, you know, Mastercard, Marriott. I, we have to wrap. But I do want to get in a quick rapid fire this or that. These are quick questions. Quick answers. No hedging if you can help it. Are you ready. Saverio Yeah. All right. Building on your last answer, if you could only own one for the next five years, Nvidia or Alphabet. Yes. Nvidia, Tesla or Eli Lilly. Tesla. Tesla. SpaceX. SpaceX That's I guess Netflix or Spotify. You or Netflix. You booking or Airbnb. Exactly. Booking CrowdStrike or Palo Alto Networks. CrowdStrike. Better growth stock from here. Apple or Microsoft. You know, some. Yeah. Well okay. That's it. It's difficult, but I would say, growth stock, probably Microsoft. But Apple integrates look. Even with Tim Cook out now still an opportunity and Apple. Yeah. Because eventually you will need the hardware and you will need the very capable hardware. And that to my point where you want to, you want to own your metal production. If you look at consumer, I believe with the with the proper hardware, with a very powerful blender, that there's going to be a lot of things that be able to do in the future, coupled with the open source, more powerful hardware. And Apple plays right in there. So I wouldn't discount that. A few more quick rapid fires for you Mega-cap tech or the next generation of AI winners. I would say large competition. So if you had $1,000 to spend today, AI infrastructure or software. Infrastructure. Which stock and ncai would you be most comfortable buying after a 20% rally? After a 20% rally, I would say many. Not just one of these. Many of them, Nvidia. Which needs to be bought on, which needs to be bought on the dip. At this point. I, I would say semiconductor chip, I would buy them if they test the rules. Okay. And just quickly because I'm sure someone will have the question why SpaceX over Tesla. Because again, I believe it's, It's a more integrated player. Again, it's building this huge infrastructure. It's trying to build an application layer, also with curso, and so I think, I think is more integrating player. Although Tesla is a very interesting stories because believe me, robotics would be would be very important would become arguably an ubiquitous product. But you know, with Elon's companies, you never know what what can happen. Right? We have seen X being acquired by, by SpaceX, Exxon, who knows what can happen in the future. Right. So I would treat them as, as sisters companies. Yeah. A lot of calls for them to that. They'll be combined by next year. Have to leave it there. Saverio Papagno. thank you so much for your for playing along for your picks and for shedding some light on your fund. I really appreciate it. It was a pleasure. If you enjoyed this ETF spotlight, check out our interview with Mark. Zeitoun on how investors can generate income while staying invested in the market.