Exploring AI Investment Opportunities Beyond Mega-Cap Tech Giants

The next guess is you don't have to own the Mega caps to play the AI boom. She sees opportunities in mid caps from the companies powering the build out to those actually using AI to boost productivity. Lori Keefe, Parnassus Investments portfolio manager and senior senior analyst, joins us now. There's picks and shovels, but picks and shovels can be big or small. Well, somewhere in between. And we've become so focused on this small group of ginormous technology companies. We talk less about the rest of the field. And that's the field that you play in. That's correct. Thanks that. It's great to be here. And absolutely I mean, we're seeing really this opportunity broadening out, but beyond just a small group of players which have really powered the CapEx trade so far. And we're seeing that broaden out to many of the companies that maybe aren't even thought of as ie companies per se. They're not known as technology companies, but you're seeing the value chain expand beyond just the compute the memory players into areas like water and power. I mean, these are critical areas when you look beyond the value chain that are going to be needed to support the growth of AI and data centres. Um, and so there's a number of really interesting opportunities, I think, that sit beneath the surface in the mid-cap arena, uh, that we find very attractive. I'm really interested in how that's played out over time. If you take high bandwidth memory as the example. Um, it's been quite some time where high bandwidth memory is part of the service design, and it seemed like overnight we were like, oh my goodness, everyone needs high bandwidth memory. Um, is that analogous with what's happening in power? More so people are saying, oh, we better do something. I think it is. I mean, there's obviously a lot more challenges as you move from to, to the law of physics around implementing some of the power needs that are required to support all these data centers. And so there's, I think, a whole breadth of opportunities that aren't necessarily as focused on. But when you think about not only the high, uh, the data centers around, um, the need for power and energy, but also water. Uh, when you look at the scarcity of water. The water treatment that's required all the way from the actual development of the chips into the data centers for cooling. That's another really interesting area that I think as an enabler. Those companies that are providing those technologies are going to be very well positioned. When you look out over the next 5 to 10 years. When you look at the Mark seven, there's a lot that's analogous between them. They are hyperscalers or they have similar business models, or they rely on the same partner, Nvidia, in the mid-cap segment. There's a lot more diversity, very much so it's a it's a bigger field like that. How do you how do you pass all of that. Yeah it's a great it's a great point. And I would say within the large cap arena, when you look at the concentration in the index, in the large cap index, roughly about 40% of the index is driven by 10 or 10 companies. When you look at mid-cap, the largest constituent is actually closer in about 70 to 80 basis points. So a lot more dispersion, a lot more opportunities. That and I'll also say, you know, just from a valuation perspective, you've got large caps trading today close to 21 times. You've got small tops closer to 25 times and you've got mid caps around 17 times. This is a very attractive value relative to comparable earnings growth that we see over the next few years. And so we think we think there's a lot of great opportunities. Um again and also the concentration the sector composition is quite different than large cap. So you're able to diversify away from this very what is becoming a more crowded trade into areas that will benefit from I. But they're not dependent upon AI. So a lot of the opportunities that we focus on have AI is an enhancement, whether you give a case study. Absolutely. So let me start with let me start with a company like Hubbell, which is one of the leading providers of equipment that goes into the grid and supporting the build out that opportunities that was already there before. I as there's a need to modernize the grid as you're diversifying your power sources, transitioning away from coal so that that is actually getting enhanced by the need for more data centers and the need for more power. Um, so that's a great opportunity. On the user side, though, I would also point to even a company like a Robinhood. Uh, Robinhood, actually, there's a whole host of companies when you look out, where's the next spectrum of opportunity? Those are companies that are able to leverage AI to improve their business outcomes, to improve their competitive advantages. Um, in terms of Robinhood, they are now powering about 75% of their customer service calls using AI. So that is it leading to very tangible benefit as well as incorporating that into engineering those. Certainly it's early days on the user side, uh, from an enterprise perspective, but we think there's a really long tail as those users start to adopt AI and strengthen those competitive advantages. We should see that over time be broadened beyond the use cases around customer service and engineering that most, most companies have focused on so far into things that help to really drive margin. We started this conversation saying the S&P 500 set another fresh record high. I mean, stocks go up and down as, of course, but one of the biggest contributors or the best performers in states Western Digital. Yes. And that's probably is a more crowded trade. You know, the story is quite well known at this point, but it is a name that you that you hold and that you think about. Where does it fit in your broader thesis? I think absolutely, it's a key enabler. As you look at the need for storage as AI, the amount of data, the amount of compute that's driving all the lessons that are driving new data that hard just drive business will continue to be really relevant. And we think there's a long secular tail for that. So we've actually held that for a while for the last couple of years, but we still still see a nice runway for growth. Um, given, uh, given the opportunity there.