Alger Funds CEO: AI Boom Still Has Room to Run
Source: morningstar.com
What Happened
While some investors fear the AI surge mirrors the dot-com bubble, Alger Funds CEO Dan Chung believes the boom still has legs. He argues that today's AI leaders are more fundamentally sound than the internet companies of the late 1990s, suggesting the rally has further to go.
Why It Matters
Chung's perspective offers a counterpoint to the growing concerns about an AI bubble. He highlights key differences between the two eras, particularly the financial strength of current tech giants compared to their dot-com predecessors. This challenges the narrative that AI stocks are destined for a similar crash, potentially influencing investor sentiment and strategy.
A critical difference lies in profitability. Back then, companies like Amazon weren't profitable, and investors who were overly focused on short-term cash flow missed the bigger picture. Today's AI leaders boast impressive revenue, operating cash flow, and free cash flow, even after significant AI-related capital expenditures. These strong financial metrics suggest a more sustainable foundation for growth.
Microsoft Then and Now
Chung uses Microsoft as a prime example. During the dot-com bubble, Microsoft traded at a P/E ratio three times the market average. Now, its P/E ratio is closer to the historical norm, despite being a larger and more profitable company. The fact that a leading tech company is trading at a more reasonable valuation suggests the market isn't as irrationally exuberant as it was in the late 90s.
Furthermore, the current interest rate environment is markedly different. In 1999, rising interest rates put downward pressure on valuations. Today, the bond market signals potential rate cuts, which could further support equity valuations. This macro backdrop offers a more favorable environment for AI stocks compared to the dot-com era.
Nvidia vs. Cisco
Chung also contrasts Nvidia's current valuation with Cisco's during the dot-com boom. Cisco's P/E ratio reached a staggering 126 times earnings. Nvidia, despite its impressive growth, trades at a much more reasonable 33.5 times earnings, based on consensus estimates, although Alger Funds' internal estimates suggest it may be even cheaper.
Chung’s Stock Picks
Besides Nvidia, Chung highlights Nebius as a promising AI data center company. He notes that Nebius is experiencing rapid growth and has secured major deals with hyperscalers. This suggests that the AI boom is not just about the well-known tech giants but also creating opportunities for smaller, specialized companies.
According to Chung, Nebius, which has an open-source data management business called ClickHouse, is projected to increase its revenue five-fold, from $500 million in 2025 to over $2.5 billion in 2026. He believes the stock should double in value over the next three to four years.
Our Take
Chung's analysis provides a nuanced perspective on the AI boom. While acknowledging the potential for market corrections, he argues that the underlying fundamentals of the leading AI companies are strong enough to support continued growth. His comparison to the dot-com bubble highlights the importance of profitability, reasonable valuations, and a favorable macroeconomic environment.
Looking Ahead
The AI revolution is still in its early stages. While the market may experience volatility, the long-term potential of machine-learning tools remains significant. Investors who focus on companies with strong fundamentals and sustainable business models are more likely to benefit from this transformative technology.
However, Chung raises a valid concern regarding the potential for job displacement due to automation. While AI can enhance productivity and create new opportunities, it may also lead to unemployment in certain sectors. Addressing this challenge will be crucial to ensuring a more balanced and equitable society.