AI euphoria versus economic realities – tech in 2025

CR : Welcome to Silicon Valley Byte Size, an update on the tech sector from the Allianz Technology Trust. I'm Cherry Reynard and with me today is Mike Seidenberg, fund manager on the Trust. He'll be talking us through the recent wobbles in the technology sector, and how he's handling a tougher environment. So welcome, Mike.

MS: Hi, how are you?

CR: Yeah, good. Now, I don't think it's an exaggeration to say it's been a tougher start to the year for the technology sector. Can you just talk a little bit about why it's happened now and why technology has been hit particularly hard?

MS: Yeah, I mean, it's definitely been… it feels like a full year in a matter of months. Obviously, we had a really strong start to the year as a sector and, as of probably the last, you know, call it 4 to 6 weeks, we've seen that companies really sell off. You know, I think it's a variety of things. I think, on the one hand, people are trying to figure out what is the slope of the spin around investments and things like artificial intelligence, that obviously really benefited a variety of companies the past year - by the way, I still think it's an incredibly relevant secular technology and happy to go into more detail later on about that. I think it's also, we in the United States have had a new administration and the policies that are being driven from Washington, obviously have some impact, or a lot of impact, at the macro level. So, I think that there's some unpredictability there, that have caused investors to maybe just kind of take a step back and kind of figure out where we're going. I mean, I think the one I've always thought about, if you're a business, whether interest rates are high or low, you want some type of predictability to plan your business, and I think what we've seen as of thus far this year with respect to policies is they've been probably surprising at some level and be somewhat unpredictable. So, I think people are a little bit concerned as to how does this manifest itself vis-à-vis company spending, and by the way, they do need to spend on technology, and I would have said that almost every year you've ever spoken to me, but you know, I think right now we're kind of in a wait and see scenario, and you know that that's clearly impacting stocks which had had a great run last year, right? And had a really strong start to the year.

CR: Yes, it's noticeable, they're only sort of back to where they were…

MS: Sure, exactly and probably like the October or November time frame, right? So, you know, we’ve basically given back kind of what we gained in a number of months.

CR: I wonder if you can give some nuance on the recent falls? I mean, there have been obvious examples of sort of bigger falls like Tesla, but have companies like, I don't know, Apple or some of the cybersecurity names proved more defensive?

MS: Yeah, and just fair disclosure, we don't own Tesla and haven't owned it, you know, at least for the past year plus, if not more. Look there are names that I would say unfairly benefited from the election of our new president, Tesla probably being one of them, where the stock has really taken a pretty hard tumble. I mean, by the way, it's not just Tesla. I mean, there are a variety of names and they didn’t all benefit from the election. I think that what you saw, in general, are really expensive stocks, that probably got, near term, ahead of themselves, and we've seen a correction, you know, probably rightfully so. And here again, I remind myself, our job as a team is to find companies that appreciate over a number of years, and it doesn't mean that a drawdown of whatever - 25, 30% near term doesn't… you don't feel that because you definitely do. But, I'm reminding myself like, what, who wins in the long run, you know, and to your question, Apple has not pulled back like that at all. I mean, and that makes sense to me, right? Apple is a consumer staple in my opinion. It is obviously going to have some variability, but, you know, it trades in a multiple that's very different multiple than Tesla, but I think in general, when you've seen some of the more high flyer names and clearly around the artificial intelligence group, we've seen a variety of pullbacks and you know if you think about that, and we talk about this to our investors, and we invest in a food chain, right? And that food chain is comprised of pure plays and 1st and 2nd derivatives, and that's something that is a really good way to monetise a theme. In that sector, we've seen some of what I call the 1st and 2nd derivative companies really, kind of, take it on the chin near term. As people are trying to figure out what is its trajectory of spend around artificial intelligence look like in the coming year? I think the nuance here is it's not about are companies going to spend, because they are. It's really about, you know, the slope of the line, right? What does the slope look like relative to last year, and I hate to kind of get all mathematical on people, but I think a lot of technology investing is really understanding, you know, slopes of lines or slopes of curves and what that looks like.

CR: Absolutely, and I mean, it wasn't so long ago that we had the latest earnings season. I mean, it's sort of been superseded by events, but did that reveal any noticeable areas of strength and weakness within the technology companies?

MS: Yeah, I mean, if I take a look at software we had companies have really good results throughout as they reported their Q4s - calendar Q4s - going into this year, going into Q1s, and we had some companies that really struggled, and I think that dovetails well with kind of what I've been saying, over the past kind of 12 to 18 months, which is, I don't think this is a rising tide that lifts all ships. As companies kind of re-engage in spending post the digestion period of the pandemic, which, by the way, I heard last night is now 5 years in arrears, which is great news. So, I think that we are in an environment where it's not going to be as sector-specific as it is going to be company-specific within that sector, so there's a new one here again a nuance there, and I think that's something that really our process is a bottoms-up process whereby we try to identify those companies that we think are going to garner those dollars, and there wasn't any huge take away from the earnings reports because I would say on average, they were pretty mixed. Like you had companies do great and really give good guidance and you had some companies, you know, really kind of give forward guidance that was head scratching. So, I would describe the environment as, across sectors, reasonably mixed. I think with a few exceptions. I mean the cybersecurity names kind of stand out with respect to just kind of their underlying growth rates. And that's been really a good sector for us over time, but you know, we're definitely, I think some of the euphoria that we saw around artificial intelligence, is coming back to more reality-based as we march through 2025.

CR: I mean, let's talk about that for a bit. I mean, what's your view on the AI trend? You, you said earlier that you still think that's very much intact, but will it look any different in 2025?

MS: Yeah, I think it will look different. I mean, I think that as companies go from trialling some of these solutions to actually moving them into production. I mean, by the way, not everything's going to work, that's just the nature of the beast. So, I think it will be a little more mixed, you know. I think that it is a super important theme and a super important technology, but it's not a cure-all, and therefore, we're going to see, we're kind of going to go from the trialling stage to the implementation stage. I'll tell you the sector I’m probably most excited about it for - the sector that is most exciting to me for artificial intelligence is really around software and what it could mean to the customers and what it, you know, I was on a call recently with a CEO of one of our companies, I think it was Crowdstrike, the CEO was talking about the amount of productivity they're getting out of developers, and I started doing the back of the math, back of the envelope math. I was just like, wow, that really pays for itself quickly. So, you know, and here again just for our investors when I'm talking about developers, I'm talking about people that are developing the product that Crowdstrike sells, right? So, you know, making your inputs cheaper potentially and more efficient is really powerful. And then obviously there's the other side of the coin, which is using those same type of technologies on the product side. And, you know, I call out like HubSpot, which is a company we own, which is a business I've been excited about for a long time, you know, just exciting to see just how they're using technology.

CR:Absolutely. And the… I mean, obviously some of the froth, if you like, has come out of the market in recent months. Is there anything that you're adding to? I mean, what is your overall view on valuations?

MS: I mean valuations, I think I was looking this morning, software valuations have come back, probably call it, you know, on average 20%, maybe even a little bit more. So yeah, we're sharpening our pencil and there are a lot of businesses that we work on and we don't, aren't able to make the risk-return work, right, in a given point in time. And that's really important and, here again, going back to the process, going back to the team of having a stable, you know, to use a horse analogy, of ideas that when it gets to a point where you say to yourself, wow, this is great risk-reward, let's dig in and figure out, you know, like have our models changed? If so, let's make the adjustments. Yeah, I mean, we're, you know, we're definitely looking at this as an opportunity for certain names in certain sectors, for sure.

CR: And I mean, what about, you know, if the sheen comes off the mega-caps a little bit? Do you see a rotation from the mega-caps into other parts of the market? I mean, I know that's naturally where the fund is positioned in the sort of large and mid-caps.

MS: Yeah, I mean, and you’re correct, in that we had deployed more dollars last year out of mega-caps into kind of large-cap mid-cap, and we still have that tilt going, you know. I would think that what we've seen from the mega-caps suggests that they potentially aren't as robust of earners going forward as they have been. I mean, they've been amazing stocks, and just utterly amazing, you know, I'll also tell you that in a tougher environment, and they will do better probably, right? Because it's safer to buy from a mega-cap company for a lot of customers than it is to buy from a company that maybe is more nascent. So, it's a little bit of a tale of two cities there, but I'm optimistic, that we will see some of these mid-caps, mid-cap / large-cap companies, kind of, you know, outperform the mega-caps, but who knows in a given, you know, 3 months’ time period.

CR: Yeah, absolutely. Now, you mentioned the new administration earlier, and obviously it's been quite a busy start, let's put it like that.

MS: Correct.

CR: You know, with a raft of new policies. Are you seeing that come back on the tech sector in any way?

MS:Yeah, I mean it's, I think it's impacted every sector. I mean, I would say at the margin for a lot of the companies we invest in some of the, some of the talk around tariffs aren’t nearly as relevant, but they are relevant to the companies that our companies sell to, so I think that I think that businesses in general - and I said this earlier - I like predictability and to have a rash, I have a bunch of policies be enacted and one day what they do is a 30-day hold, I mean, you know, lots of lots of what I would call fairly chaotic behaviour, from an administration. And look, there may be a method to the madness and ultimately our job is to figure out within the context of a macro environment, of which policies really matter, how to execute a portfolio for our investors. So it’s something we need to live with. It's something we're going to live with, you know, these are early days. I think for most businesses, it can be head-scratching, right? I mean, I think it can, it can kind of cause you to pause. Having said that, you know, the consumer for the most part looks pretty good. I mean, the consumer has just been amazing, over the past few years, but that's a portion of, when I think about the things I really focus on at a macro level, I really focus on kind of what the consumer does because I've always said, ‘how goes the consumer, goes tech’ and I think that's a fair analogy.

CR: Absolutely. And then, just to round off, I wonder if we could talk through, I mean, there may not have been any, but, any kind of changes to the portfolio over the quarter, or any updates that you'd highlight?

MS: I mean we're always finding interesting businesses that like I said, they kind of give us the chance, you know, to buy things. If I think about just kind of recent stuff we've done, you know, if I think about semiconductors, kind of looking at some of the industrial semiconductor companies that we didn't know last year, thinking that that sector may have a better outlook going forward. I think it's still TBD, but, you know, those companies are pretty cheap, and then just kind of picking and choosing with respect to some of the software companies we've exited a couple of names just on bad results, which is fair because I'm a firm believer in if our thesis is wrong, which happens in this business that, you know, we need to reassess and decide was it a one-time event or if the thesis is wrong, we probably need to move on, because nothing requires more work than a problem stock you don't believe in. I've learned that from my 20-plus years of investing.

CR: OK, great. All right, we'll wrap up there. Thank you so much, Mike, and thank you to all our listeners for tuning in. As always, you can find out more about the Trust at the website www.allianztechnologytrust.com. Until next time.