While tech giants such as Apple (AAPL), Microsoft (MSFT), Alphabet’s Google (GOOG, GOOGL), Meta (META), Amazon (AMZN) and Nvidia (NVDA) dominate markets, a new group of innovative tech companies is emerging, set to capitalize on the AI trade. This episode explores the untapped potential of lesser-known firms such as Hubspot (HUBS) and Micron (MU) that can stand with the likes of the tech sector’s biggest contenders.

Today on Opening Bid, Yahoo Finance Executive Editor Brian Sozzi sat down with Goldman Sachs Asset Management portfolio manager Brook Dane to discuss identifying high-potential tech investments amid market hype, strategies for navigating the tech sector during an election year, while evaluating which up-and-coming names are best positioned to thrive in the AI-driven future.

This post was written by Angel Smith

Video Transcript

Welcome to opening bid.

I’m Yahoo, finance executive editor Brian Sazi.

Now let’s make some money and hopefully get a lot smarter here with me.

Now is Goldman Sachs Asset Management, portfolio manager, Brooke Dame Brook.

Good to see you in person for a change.

Brian, it’s great to be on for the time.

We got a lot of stocks to talk about.

But um look by no means is this a political podcast?

So we’re not going down that route, but the world has just watched a major event in this presidential debate.

Hot takes on both sides of the equation.

One takeaway is that this could be a challenging time for the markets going into the back half of the year because we have one guy saying this one guy who couldn’t put a couple of sentences together, what should an investor do after they watch this big moment in time?

So, you know, anytime you have a big um chance for a structural change like that, it’s important for investors to be balanced, heading into that kind of uh environment.

So we’re always talking about clients uh about being balanced in their portfolios, being balanced in their outlook, you know, even within our tech portfolios, we’re always trying to kind of balance out risk and reward with something like this.

You know, um you can look at different industries and sub sectors that will benefit or lose depending on kind of which party wins in November from a tech perspective though, actually, like the the political environment doesn’t change that much under either one of them.

Uh you know, that there’s going to be increasing scrutiny around social media, you know, that there’s going to be increasing tensions and um rhetoric around China us.

Um So those are kind of the big things to focus on and just to make sure that you’re balanced across those kind of vectors and areas when you talk to clients, are they nervous?

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Do they sound more nervous today than when they did three months ago when you talked to him?

So, you know, it’s interesting the client conversations we’re having right now are all around A I.

And um what I would say is, is that it’s so focused on, you know, where are we in this A I cycle?

Where are we with this massive transformation we’re seeing and how should we be positioned?

And that is, you know, the kind of questions, 12345, when you get into the risk aspects of things, which we’re always doing, that’s when this comes up as well as um you know, some other external events.

So it’s not Um So they’re not saying, bro, I gotta get the hell out of this stuff.

What do I do if I think the world is going to hell in a handbasket in November?

You’re not, you’re not getting those.

No, that’s not, that is not the tenor of the conversations at all.

It’s more of OK, this is the biggest structural change we’ve seen in tech in 15 years.

How should we be positioned?

What do you think about the risk rewards out here?

You know, how do you think we should be approaching, taking advantage of this?

Are there key winners um depending on who wins the election?

I mean, do you have a basket that if Biden wins?

These do well, Trump wins, these do well or don’t invite.

So there definitely are baskets out there that are positioned on either side of that.

And in fact, one of the things we do from a risk management standpoint is we’re running our portfolios to understand the exposures on either side and look when you’re, when you’re managing, you know, pools of assets on the client’s behalf.

Like our whole thing is we’re trying to drive stock selection to give you the return.

So my opinion on stock X versus stock Y, we want that to be what drives the alpha.

We don’t want it to be some random embed on a political outcome or the way interest rates move or if energy prices go up or down.

So we’re always using pretty sophisticated risk tools to basically stress test our portfolios and see how they would react under different scenarios.

So, in fact, I was just in a meeting yesterday where, where we’re going through this exact scenarios across our portfolios of.

OK, like if, if this is the group of stocks that we think would, you know, move on a, a Republican win or a Democratic win?

Like how would that play out across our portfolios?

And then the, the questions from the risk teams back to the portfolio managers?

Is, are you comfortable with that level of risk?

Do you think that’s the right ex you know, expression in your portfolio?

You know, is it, is it bigger than you thought it was or smaller than you thought it was?

Is there one more a I friendly group that you have determined that would whoever wins?

This is the, this is the group that’s going to let A I be A I and spread throughout society.

Yeah.

So no, is the short answer from that standpoint?

I think Washington in general is lagging behind understanding how profound this change is and how structural it is.

And um that’s sort of been the playbook on Washington and tech regulation for the last decade that, that the tech companies and the pace of tech innovation is just moving at a faster pace than the regulators can catch up and understand.

Actually, like from a regulatory standpoint, we’re probably more focused on what’s happening in Europe than what’s happening in the US.

Because the European regulators are more uh aggressive in, in kind of their stances and how they’re pursuing things.

How do you see regulation in the US?

How do you see that playing out over the next five years?

Yeah.

So, um I think that, you know, you’ve seen this incredible concentration in the US market.

Um Both, you know, you know, obviously, right now in this moment of a I, you’ve seen, you know, the narrowness of the market.

Um and then also on the social media side and these, these mega scale tech companies, they are becoming so incredibly large and impactful that I think you, you can’t not discount the risk that at some point, the regulators get more aggressive.

The problem is, is that the tools the regulators have aren’t particularly adapted to, to the current reality.

So, you know, we’re always watching it and thinking about kind of how could this change and how could this impact stuff?

Is this, is this a decade, potential decade of, of tech breakups?

I don’t think so honestly, like, I, you know, we, we talk about that a lot and think through those things, but there’s no, there isn’t a to look like, yeah, well, I mean, some of them, you could like, you could understand how different businesses could separate from the main, but it’s, it’s very hard to see what regulatory environment there is that would force that kind of outcome.

So you mentioned having more concern about Europe, what is Europe doing on the regulatory front compared to the US?

Yeah, so the, the two things to watch on the European side is with the privacy um rules that they, they’ve put into place.

There’s something called the D MA.

Um first of all, it limits the ability of some of these companies to use the data that they have as effectively to drive revenue.

So, you know, one of the things that, you know, before we even talk about gen A I like classic A I has had this incredible uh impact across social media platforms where they can, you know, they can really drive attention and time spent because their algorithms are just better at engaging you and keeping you, you know, focused on your phone instead of the world around you.

Um The European regulators are trying to limit some of these companies ability to use the data they have and then they’re backing it up with real impactful fines and, and meaningful things.

And so from that standpoint, um there’s more teeth in the regulation, it ha it has more real business impact in the ability for large platforms to grow into scale.

Um And then there’s, you know, beyond D MA, there’s other things as well that are happening there that you could see them both limiting the top line growth of some of the companies in Europe and impacting them from a cash flow P and L standpoint, are there certain us companies that have that European exposure that might see slower than expected growth rates because of that.

So all the big platforms have pretty good scale in Europe and matter.

So if you’re thinking about, you know, the the software internet and uh handset, you know, Apple Microsoft, Google, Facebook, Amazon are all in the, in the focus, probably Microsoft less than the other four.

But those are the ones where we’re really watching to understand the impact.

Um So I recently caught a podcast with Microsoft co founder, Bill Gates.

And he, he was making a comparison between valuations and the potential for generative A I.

And now I guess he’s, he’s co out of Microsoft.

So I get where he’s coming from.

But he said the potential over the next 1020 years is just massive and maybe a lot of these stocks are still cheap.

Help us understand like what are you seeing from a gen A I perspective that will make stocks that are trading 34 times the market multiple cheap.

So like when we, we firmly believe that um this is a profound change in technology.

We were just out in the valley meeting with everyone from the CEO CFO S of the world’s largest companies down to, you know, the the leaders of these private frontier model companies.

So like, literally, I’m just back from that trip and what I would say is is that the, the step function changes that we’ve seen are just the beginning.

And what we’re gonna see from these tools over the next 2345 years is incredibly profound.

And we do think it’s gonna drive this kind of massive increase, excuse me, massive increase in productivity across the white collar workforce.

And is is gonna like fundamentally, you know, change the, the the way people work and interact with technology.

The other thing though is that we’re so early and with any, like, I’ve been a tech investor for a long time and been doing this um for a bit, these things don’t move in straight lines.

You have these periods where you have incredible excitement and incredible acceleration in businesses and then you have a digestion period and then you get the the next uh kind of knee and the curve.

And so, you know, from our standpoint, we’re really focused on trying to answer some big questions about what we’re seeing here, but from the valuation standpoint and from how you, we think about where the opportunity set is.

Um you know, if you look at the growth rates of these businesses and project them out and project the returns on capital and the capital spending and where the free cash flows are gonna come, we’re finding really attractive opportunities.

It’s not across the board like we can, I’m sure we’ll get into stocks in a minute.

Here, but like there are areas where we think the market is massively missing the opportunity set and there are parts of the market where the risk reward is more balanced and, and frankly, a little bit less interesting to us.

So it does depend stock to stock.

Um But that’s kind of what we’re trying to do when you’re meeting with these leaders a during a trip like this.

Did you come away with the sense that a lot of them are like they’re foaming at the mouth that just, they’re just too excited.

And that, that’s a, that could be a risk.

So look, I I when you go, when we frame this opportunity first, like as I said, we think this is like the biggest tech structural change we’ve seen in 15 years, at least it’s a profound um opportunity set.

The second thing that’s really unique about this is this is a public markets phenomena like there, there is not a big private ecosystem around this.

We’re not thinking that there’s gonna be a tremendous amount of disruption.

If you look at every single past tech wave, the um the incumbents lost because the newer start ups were more nimble.

The incumbents were kind of um tied to legacy architectures that didn’t adapt.

And so that created the openings for the next generation of companies, whether it was first, you know, the sales forces and, and in the, in the move to the cloud or then the move to Mobile with Google and Facebook, like those guys had better architectures at the time, they were able to scale it’s different this time and the power of data and incumbency is incredibly large and profound and matters.

Um So our our bias coming in here first off is is that this is a public markets event.

There’s gonna be some private companies and obviously the frontier models will come public at some point in time.

But there’s not this vast um tale of privates out there that are gonna disrupt the baskets of big companies that we know today.

So that’s particularly intriguing to us.

You know, the second point around this is, is that you’re right now, all of the activity has been around the infrastructure build outs and all the chips in the networking semis.

We think that the next leg of this is on the software side and that’s where we’re really excited and really doing a ton of deep work.

All right, hang with us.

Uh Burke.

We’re gonna take a quick break, but don’t go anywhere.

We’ll be right back.

All right, we’re having a great conversation here at Goldman Sachs Asset Management Portfolio Manager.

Uh Brooke Dame, you mentioned Brooke, you have seen a couple of these cycles in your lifetime.

I mean, I thought you were 25 but you know, it is, it is, it is, it is what it is, compare this period, this excitement, this boom to that tech run up in the late nineties and 2000.

I was reflecting back on an earlier episode of opening bid and we talked to John Chambers, of course, of Cisco live right through that period.

He did say this time feels different compared to that time when the internet was just emerging.

But I’m curious on your take.

Yeah, it it it it’s a very different environment, it’s a very different market.

Um So first off, like, you know, the businesses that we’re looking at are generating free cash flows are generating revenue.

There was no, there was no, they had cash.

Yeah, exactly.

They had something, maybe something.

So like just the starting point, these are real businesses with real gross margins, free cash flow ability to grow um all of those things really huge difference.

And then secondly, the starting point on valuations isn’t anywhere near the same range.

It was during the bubble, right?

So, you know, even the stocks that have performed incredibly well over the past year, it’s largely been earnings driven.

So sure multiples have come up a couple of turns, but it’s not like they’ve gone up, you know, 15 X and you know, yeah, so from our standpoint, like we’re, we are, you know, obviously like very focused on what are we paying for the assets we’re buying?

Like, uh you know, we’re all about risk reward, we’re all about understanding future cash flows.

Um And you know, honestly, like things look really attractive to us, especially if you start to get inflections and growth in other parts of the market that we haven’t seen today.

So it’s very different from what it was back then.

And also, um you know, the other thing is, is that back then there was just so much excitement that stocks would move on, you know, like news announcements and, and rumors and just like randomness like chat board.

I actually like, I uh a little digression here but I was an investor, you know, through the late nineties and then I went back to business school in 98 and I remember going to business school, I went to cal uh go bears.

Um And uh when I first started school, all my classmates were day trading stocks and I was like, yeah, I was like, wait a minute, like I’m gonna like, I grew up as an investor.

I’ve learned how to do this stuff.

Like how are you making this much money?

Like swapping stocks?

So anyway, but different environment now, there’s definitely like some retail activity going on out there.

But in these core tech stocks, in the core beneficiaries out there, like I, I feel very comfortable that the starting point we have here is attractive.

Now there are risks, there are some questions, right?

We’ve been through this massive Capex cycle.

We’ve only seen a couple of interesting application loads to take advantage of that.

Like we need to see more applications.

We need to see the game changing things that we think we’re gonna get.

But it’s early still.

So that, that’s, yeah.

Well, I got, I have one for you, uh, memory for you now that you brought that up.

So I think it was 99 or 2000.

I was getting ready to graduate from high school and I was playing the Yahoo finance stock investing game.

It was like nobody had this thing on the at all.

You pick on stocks and it was like a fantasy uh stock game.

Global Crossing was my pick.

I have no idea why I picked it.

Didn’t know what the hell I was doing was it GB Rx, maybe the symbol, whatever it was.

But you were just caught into this hype it and to your point, I don’t think it feels like that.

No, it, it, it’s very different and there’s a very different tenor and actually, you know, um if you look at how these stocks are trading and even more recently, like as you went through this last quarter, you saw how quickly the, the software universe pulled back um on, on very rational reasons.

But you know, that to me is actually an encouraging sign.

Right?

First of all, it gave us a great opportunity to build positions in companies that we love and that we think are going to compound out at high rates.

But also the fact that the market was like, hey, wait a minute, these companies didn’t do quite as well in this quarter as we thought and then said, ok, let’s let’s take them down and, and re rate them down on the negative side.

I want to get into your uh future tech leaders equity uh ETF but I think before we got there, we have to just at least acknowledge what’s happening with NVIDIA.

Now, we just had a valuation discussion.

Maybe I’ll impress you here and maybe I won’t whatever it is.

Um Nvidia’s price to for price to sales ratio 21 times Microsoft at about 12 times.

I think Apple’s at eight times does an NVIDIA which I think impacts a lot of companies in here and by some, by some measure, are they really worth it?

Are they really doing something to warrant a 3.4 trillion market market?

So um let me frame this out a little bit for you.

So first of all, I talked earlier about how there’s lots of questions we’re trying to answer and we’re trying to figure out the solutions too.

And um I’d love to pretend like I know exactly where A I is going over the next five years.

But like we’re all trying to understand and, and put the pieces together to, to derive investment thesis and, and action on our client accounts.

The, the the chip discussion around generative A I is a fascinating one and there’s lots of nuance to it.

So first off, you know, first order of magnitude, we’re seeing the initial Capex builds of all these data centers to run um architectures that can, can uh run these models that is massively benefited NVIDIA.

They have this incredible mode because of their software ecosystem.

And because, you know, frankly, they’ve, they’ve, they’ve got that wonderful fly wheel of having developers having a bigger installed base, having good software that then attracts more developers and then attracts more installed base.

And it’s, it’s performing exceptionally well that said like one of our base thinkings in the world is in general, capitalism works and they’re making huge margins right now across what they’re doing.

You’re seeing the big hyper scalar right now, invest heavily in their own Asic chips.

So chips that they’re designing themselves to run these workloads within, you know, uh GCP and aws and Azure um to help um basically reduce the cost structure and, and compete with NVIDIA.

So um we’re always balancing in our investments in our thinking about stocks, two things, two fundamental things.

Where are we different than the market?

Like what’s, what’s the fundamental outlook, the thing that we have that we think the market has yet to understand about a business or a company.

And then what are we paying for that asset?

And it’s all we’re always balancing those two things to figure out positions, position, sizing how we build portfolios.

Um oftentimes like you can be in the stock that you have incredible fundamental strength and power in the near term.

But you think is running up against, you know, reasonable outcomes of fair value.

And then you start to think about position sizing with that, but you don’t want to, you wanna respect the fact that the fundamentals are so powerful and that you can be wrong about how long and how powerful they could be.

That was a long way of not really exactly answering the NVIDIA question.

But what I would say is that we’re super excited about the the rest of the chip ecosystems that they will have ambassadors.

And I think there’s just thinking on NVIDIA that over the next 20 years, it’s just NVIDIA and nobody even exists.

And this company has a clear path to a $10 trillion market cap.

So there’s, there’s very little likelihood that there isn’t competition out there.

And in fact, we think the Asic guys are doing an incredible job and likely to build scale that said NVIDIA is not standing still either and they’re trying to forward integrate actually up the stack in some interesting ways.

So we really like the Asic chip vendors right now and, and companies like Marvel, which you know, has been a long term holding of ours is one of our top positions across our funds.

We think the market does not appreciate how big the Asic A I chip opportunity is for them.

And we, yeah, and what’s the play because that’s what I highlighted.

So your top three holdings if I got this right?

Kl A uh Marvel and Mikron, were you concerned about that?

Micro quota and guidance?

Yeah.

So um with micro specifically, the the market got freaked out because they upped their cap ex a bit and people, historically, memory has been a commodity industry when supply comes on bad for margins.

Um You know, you wanna be careful about that.

What I would say with, with our outlook on micro specifically were so constrained on the high bandwidth memory side, the capacity they’re talking about adding is gonna take three or four years to actually um hit, you know, they’re, they’re basically pouring concrete.

Now.

They also had to do some of this to take advantage of the Chips Act funding that they’re getting from the government.

So it was very logical from our standpoint about what was happening.

We still think as you look forward opportunities around gross margins for this company, for this company specifically and for gross margins to scale is incredibly attractive.

So long answer is, is like we still feel quite good about micro and its position and where the valuations are for that stock and the likelihood that, you know, um earnings move substantially higher over the next two years and the multiple is actually really attractive on that.

And why is your biggest bet on K A?

So, you know KL A like is just benefiting from this wave of semi cap investment that we’re seeing.

And it’s a fantastic company that we think has huge opportunity to take market share from its competitors.

You’re seeing this massive move across the world to reso semiconductor capacity.

Um And so in the US, we have the Chip Act Chips Act, there’s something similar in Japan happening.

Europe’s working on its own thing.

There’s gonna be a tremendous amount of activity to build capacity at the leading edge in new geographies in new areas.

And we think KL A is one of the prime beneficiaries.

That’s why I love uh I knew I was gonna fun talking to you because you could probably literally talk about every single tech suck.

That makes my job.

That makes great conversation.

There was one, I’d say there’s one maybe outlier Snap isn’t, is what is the play there?

Because I think if you pull up a recent 10-Q for, for a meta, I mean, they’re crushing it every quarter continues to get that much better.

X, who knows what they’re doing under Elon Musk?

What is the play with Snap?

Why, why is it in this portfolio?

So, um Snap is a name we’ve own for a long time.

Um We’re um we’re very, we follow the company exceptionally closely.

Here’s what I would say for Snap.

Um They have been uh essentially replacing the engines in the wheel on the cars, they’re racing down the freeway.

So um Yeah, exactly.

You know, they um with the changes in privacy that we saw coming out of Apple, um it really impacted their business and in a more profound way than I think the market appreciated initially.

But they’re at the point now where they’re coming out the other side of this, um They have incredible user engagement.

They still have the most valuable audience globally and they’ve just under monetized this business right now.

We think that we’re at the point now where they’re gonna start to do a much better job of monetization.

Um you know, they fix the underlying tech uh ad stack and platform.

And, you know, frankly, if you start doing the math around where they should be driving kind of monetization per user per minute, like it’s significantly higher than this.

Um At the same time, you’re in a market where the ad spending is recovering and people are leaning into how do we generate demand and how do we drive, you know, user acquisition and those things, we just think snap is incredibly well positioned for that.

And then when you look forward it at what those growth rates could mean from a profitability and free cash flow standpoint, you know, because this company has taken as much restructuring actions as they have over the past two years, the leverage in the model is incredible.

And so when we look at our numbers and our forecasts about, you know, where the profitability of this business could be kind of what, how fast they could be growing as, as demand normalizes and their tech stack kind of, you know, proves them out is simply just much higher.

So for us like and great point to also talk about balance.

Again, you look at the size of snap in our portfolio.

We recognize that it’s a wide range of outcomes.

It’s a volatile stock.

We’re always trying to manage position size.

But fundamentally, we just think this company is massively under earning and that as we think 23 years forward, it’s gonna be a much bigger company with a much higher revenue and cash flow scale.

And of course, these are all key names in the future tech leaders uh equity ETF before we go, I, I like to leave everyone a little more inspired um than they were the day before for investors that are out there watching all these tech stocks seemingly go up every single day.

How do you go about picking a great tech stock?

Yeah.

How do you know you’re not going to be left?

I mean, I guess you never know, but how do you know you’re not going to be left holding the bag at, let’s say NVIDIA when you buy it, it’s now at a top and it’s gonna go straight down.

So um 11 quick thing that I tell all the investors that I speak with is first of all, like this is this is the most important sector in the market bar.

None like the changes we’re seeing here are gonna drive huge alpha and, and wealth creation for people.

Secondly, this is the most important part of the market to be active investors in.

You can’t buy passive benchmarks around this because they’re completely misaligned with where the future is going.

The third argument I’d say is hire someone who’s a professional who’s looking at these things and, you know, hopefully it’s gold, the Acts and the future Tech Leaders Fund or the Tech Opportunities Fund.

But um but you know, have professional help, but then do your work understand where you think the growth rates of these businesses are, what their free cash flows are and honestly lean into a little controversy.

Well said, uh Goldman Sachs Asset Management Portfolio manager, Brooke Dane.

Good to see you.

I could do this all day with you, but unfortunately, we have to go, Brian.

Thanks for the time.

That’s it.

Uh For the latest episode of opening bid.

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