Key takeaways:
- AI growth remains durable, with demand still outweighing supply
Despite significant investment in data centers and chips, demand for AI infrastructure continues to exceed available capacity—suggesting a sustained growth runway rather than a speculative bubble. - Expect volatility, but the long-term trend remains intact
As with any major technological shift, adoption will be uneven and periods of volatility are normal. However, the continued advancement of AI capabilities and accelerating enterprise adoption support a strong long-term outlook. - Opportunities extend beyond large technology companies
Compelling investment opportunities exist across the broader AI ecosystem—particularly in companies addressing infrastructure bottlenecks (e.g., semiconductors, power, cooling), where demand remains constrained and growth visibility is strong.
With companies spending so heavily on AI data centers and chips, are you worried about overinvestment or an AI bubble?
Over the past few years, part of the AI-related market volatility has stemmed from concerns about the potential for a capacity glut given the magnitude of new supply coming online: new chips, new data centers, new cloud infrastructure. But our conversations with companies across the AI ecosystem point to a more important reality, which is that supply cannot keep pace with demand.
Unlike typical market bubbles, which tend to form during periods of oversupply, the current AI landscape is defined by a persistent deficit, despite the significant capital expenditures companies are putting forth. With management teams at companies across the landscape consistently citing concerns about demand exceeding capacity, we are more worried about underinvestment.
What is your longer-term outlook for AI-related companies?
Trends like AI often persist longer than markets expect. The deployment and adoption of new technologies take time to be fully appreciated by investors, and growth is not always linear. We believe the inevitable volatility along the way is a natural part of any major technological shift.
Areas of opportunity may change along the way, but for the foreseeable future, demand for AI compute – the hardware and infrastructure needed to deploy AI – appears set to exceed supply. Companies positioned at the intersection of this supply/demand imbalance have the potential to compound growth across economic cycles, outpacing short-term expectations – a phenomenon we believe is occurring today.
It’s also important to note that the technology itself is evolving rapidly. The models available today are far more useful and reliable than they were even a year ago, with testing showing fewer factual errors and expanding reasoning abilities. Agentic AI is transforming coding, workflows, and customer service at scale – any rules-based task is a current or potential candidate for automation. Enterprise adoption is accelerating, and as AI capabilities mature, demand from consumer and personal intelligence applications is likely to generate another major wave.
Where are you looking to capture growth in AI beyond the Big Tech firms and hyperscalers?
We believe opportunity exists in the bottlenecks – that is, companies operating where supply is most constrained.
Bottlenecks span multiple layers of the AI infrastructure stack simultaneously. We are focused on businesses operating directly at the bottlenecks where capital investment shows no sign of slowing, particularly those with sustainable earnings growth visibility. That includes companies supplying semiconductors, cooling systems, energy-efficient power management, and rack systems to AI data centers.
We also are evaluating how the evolving AI landscape may disrupt industries and erode competitive advantages once believed durable. This environment reinforces our focus on rigorous fundamental analysis and bottom-up stock selection, as we seek out companies we believe are best positioned to emerge from this transition with enhanced competitive advantages and expanding growth potential.
What role can the Forty Fund play in an investor’s portfolio?
We leverage our three decades of experience in high-conviction investing to identify and invest in 30 to 40 of our best large-cap growth ideas where we believe we have a differentiated view from the market. Stock selection is the primary driver of returns in the Fund, and as AI forces evolution across industries, a research-driven, fundamental approach to picking winners and losers is more important than ever in our view.
We believe we can grow invested capital over the long term by owning the most resilient and high-quality U.S. companies. We seek companies that are gaining market share and operating in end markets that we feel are poised for faster growth than the overall economy. We also look for those innovative wide-moat companies with sustainable competitive advantages that can defend profitability against competitors and grow market share globally over a multi-year period.
Importantly, there is durability in AI as an investment theme, with impacts across all industries and sectors. Our focus on companies that are harnessing AI’s potential to build competitive advantages and position themselves for growth offers investors an opportunity to capitalize on that theme via a high-conviction, concentrated portfolio.