After a stellar run in the ‘magnificent seven’ stocks over the past year, investors need to be mindful of the risk that AI products may not achieve the widespread adoption as anticipated and priced into the markets.
This is according to the incoming CIO of Franklin Templeton Jonathan Curtis, who flagged his concern at the global investment giant’s Apac Investor Forum in Hong Kong.
Investors have been hotly anticipating the widespread rollout of Microsoft 365 Copilot and Microsoft 365 Chat, the new AI tools unveiled by the US tech giant earlier this autumn.
However, if these features are not widely adopted by companies, it might be a negative signal for the rest of the technology companies spending billions on AI, including the magnificent seven.
“If I could just get one metric 18 months from now to tell you what’s going to happen with the technology markets, it would be the adoption of Microsoft’s Office AI features,” Curtis said at the forum.
“If those are not adopted, then I am wrong and many of the magnificent seven are overvalued,” he said. “That is the big risk. Will the dogs eat the dog food? Will these technologies be adopted?”
Given the magnificent seven now account for over a quarter of the S&P 500 index and almost 20% of the MSCI World index, the valuations of these technology companies have significant implications for global equity investors.
Although Curtis owns six of the magnificent seven in the $8.89bn Franklin Templeton Technology fund, he is underweight all of them relative to the MSCI World Information Technology index.
“They’re all great businesses, I am happy to own them all, but I see much more opportunity in some of the small and mid-cap names that are less discovered,” he explained.
“They have many of the same characteristics of the magnificent seven, but they have valuations that are much lower and arguably better growth prospects.”
Still bullish on Microsoft
The Franklin Templeton fund manager is however largely confident AI features will be widely adopted because of how successful ChatGPT has been since it went viral late last year.
He said: “Why wouldn’t you want to have the world’s smartest intern sitting on your shoulder throughout the day?”
The rollout of Microsoft’s own AI tools comes almost a year after the company announced a $10bn investment into ChatGPT through a partnership with its creator OpenAI.
Curtis remains largely bullish on Microsoft despite the risk of lower adoption because of its track record of being able to deliver growth for investors and the edge it will gain from AI.
“Microsoft is going to be an enormous beneficiary of these opportunities and artificial intelligence,” he said. “It is the world’s largest software company and remarkably, it is still growing in the teens.”
Although it will play a big role in all four of Microsoft’s main businesses: Windows, gaming, cloud computing and Office, Curtis pointed to AI’s immediate potential impact on Microsoft’s Office business.
He said if every single commercial office user in the world (he estimates there are roughly half a billion commercial users today) were to adopt Microsoft Copilot at $360/per year, it would result in $180bn of incremental revenue for the company.
Microsoft’s total revenue last year came in at $198bn, which means that it would be able to almost double its revenues from just one of its core businesses alone.
“At 30 times earnings with that growth potential ahead of it, pus all the other opportunities they have in their various other businesses, that doesn’t look expensive to us,” Curtis said.
