E320 – Where is the Next AI Investment Opportunity?

A few years ago, AI felt like science fiction. Today, it's driving markets, reshaping industries, and becoming one of the most powerful investment themes in decades. But with tech stocks leading returns and AI spending reaching record levels, investors are asking a simple question, "Are we still early? Or are we getting ahead of ourselves?" Welcome back to views from the desk. I'm Hilly Cutler. And I'm Zayla Saunders. Thanks for joining us. Zayla, what's on your desk for this week? Oh, Hilly, I've got two things that really caught my eye for ETF flows in Canada this week. So investors were packing their passports. It seemed tons of flows into international development markets, EFI. We saw those attract more equity ETF inflows than both US and Canadian equities combined. So that's something new this week that we haven't talked about. I feel like in a while in the podcast. Yeah, very huge. I mean, it's been a lot kind of flip-flopping right between Canadian US equities. Did have that one week. I remember with gold flows being pretty strong. So it's the international back in the mix. Keeping us on our toes. And then the second interesting thing Hilly I saw was between cash and fixed income. It was kind of this interesting dichotomy. You saw after money pulling out of money market ETFs last week, investors are returning to cash like holdings. So not cash. But they're broadening out their fixed income exposure beyond short-term corporate bonds into aggregate and high yield strategies. So interesting play there. The interesting see if those trends persist and what it means for future flows. What's on your desk, Hilly? What's going on? Yeah, I've got a couple things. I think we'll really tie in nicely for the show today. But first off, Apple announced surprise price increases on Thursday last week. So that's across their suite of iPads, Macs, Smart Home, hardware lineup as well. It was not well received by the market. Share price was down 6% on Thursday. Force one day performance in over a year. I guess on the positive side, iPhones and Apple Watch and AirPods were kind of exempt from this particular market price increase. But a couple of our portfolio managers have been warning us for a while that prices are going to have to rise, right? So there's been surging memory costs and storage costs going up. So that's one to look out for. Second thing, and this is more broader theme. It was a really rough week for technology and AI theme stocks last week. Investors again, getting a little bit more anxious about the sustainability of the rally. And NASDAQ was down more than 4% compared to the broad S&P 500. It was only down half as much. It was down less than 2%. The semiconductor index sunk around 7.5% last week. So memory stocks really taking the hit. You mentioned about international flows earlier. And this is kind of interesting and kind of plays into it because we also saw South Korea's index was down nearly 10% last week. So South Korea has become a very tech heavy index, if you will. It's really driven by Samsung and SK high nix. So those stocks kind of got pulled down with the US technology stocks. On a more positive note last week, we did see micron report earnings after the close on Wednesday and they blew past expectations. And more importantly, then the quarter's earnings announcement was the very positive forward looking guidance that we got from my phone. So maybe an interesting time to consider more active approach in technology. I'd say so. And with that, let's welcome our guest, Jeremy Young, at Portfolio Manager of the BMO Global Innovators Fund and ZGIN, the BMO Global Innovators Fund ETF. Jeremy is over 20 years in the space, specializing research and investing some of the most exciting and innovative tech companies in the world. Jeremy, happy to have Young views from the desk. Thank you for having me, Zella. Very excited to have you on today's episode. Before we get into the interview segment of our podcast, Jeremy, can you tell us about the most important or proudest investment of your career? Well, that's a really great question. I know it's time and it's time for the World Cup now. It's just like asking one of these athletes, what's your favorite goal? So I'll give you a little story here. And more importantly, I'll give you a story what I've done at BMO. So I've been covering technology for over 20 years now. And we've seen some of the greatest innovations in the world from PC, smartphone, the cloud, and now AI. And during my career, we've made a significant amount of capital returns during that time period. What I'm most proud of is my investment in Sandisk. And this actually happened in the fall of 2025. I'm done a two out of two diligence in respect to the memory industry and what's going on with the build out of AI data centers. And what we actually identified is that the NAND market where Sandisk plays was about to inflect from a pricing standpoint, materially, because the supply demand imbalance was going to be greater than we ever forecasted. Because the hyperscale is responding billions of capital in respect of building out these data centers. And where Sandisk plays their memory is so critical that it's going to be a huge important part of this puzzle. And we're going to see a much, much larger market. So I'm proud to say that we invested in Sandisk right around $100 in September 2025. And the stock is trading over $2,000 today. Okay, very interesting. Good segue to today's discussion. Before we get into that, Jeremy, can you tell us for the listeners who may not be as familiar with you, who are you, what are you all about, what do you do at V-Mount, how do you get into this whole technology-investing space? Yeah, great question. So everyone in school and university wants to figure out, what do you want to do when you grow up? But I had the fortunate opportunity to actually become a buy-side technology analyst over 20 years ago. And like I said before, I had a front row seat to basically see the build out of the Internet, build out of PCs, smartphones, seeing the explosion of the sharing economy, seeing companies like Amazon, Spotify, Netflix, Go Public. We've actually done a ton of work on the build out of the cloud infrastructure. I've done a ton of work on digital assets. And now we're really at the birth of AI. But I'm really, really proud to say that I spent 19 years with my partner, Malcolm White. And again, we've invested together, and we've invested in, and actually compounded our fund, you know, much better than average, made fabulous returns over that time period. Yeah, I will just mention because you're being too modest. The compounding annual return on the fund specifically over a three-year period is north of 38%. So you're doing something right. Sure, you just talked about your time in the industry coming up on 20 years. And one of the things I love, you're most proud stock moment being Sandis, because I think everybody's so focused on Amazon and the Googles of the world. So it's great to hear other companies thrown in the mix. But AI is definitely, you know, can't go a day really without AI being in the headlines these days, so quite the theme. But the big question really is, are we looking at a bubble today? Or do you think that this is a truly transformative technology that's got more legs to run? So look, I'll answer it quickly first. AI is a very transformative technology. And it's going to be a technology that's going to have immense benefits to the world. So the way we look at AI is the same way we looked at previous compute cycles. I'll walk you through our framework here. So when we looked at the PC cycle, the smartphone cycle, now the AI cycle, historically, you invested in hardware first, followed by software. And typically one company generated the majority of the economics. So we think about the PC era. It was really about Intel and Microsoft with iPhones. That was obviously Apple. But what was really unique about Apple, Apple started out basically selling smartphones. But one of the biggest innovations of the iPhone was really about the App Store. And the App Store opened us up to that sharing economy. And like today, I can't live without my apps and my smartphone. So the analogies we see with AI runs in parallel to that compute cycle. But to answer your question, we've actually developed a framework to invest in AI. Like I said before, you invest in the infrastructure layer first, followed by the application and software layer, just like iPhone. So right now, all of the world is focused on the build out of the AI infrastructure layer. Look, the hyper scalars are spending hundreds of billion dollars, and almost a trillion dollars on AI cat X. And that's where the investment is. As we look forward, we just kind of gravitate is where's the puck going? Where is that next trait? And as a technology or volume manager, it's our job to basically find those investments and find when time to move. Where is the puck going? Like what does the future hold for the AI investment cycle? Think about AI over the last five years. I remember Malcom, and I had a presentation five years ago, and we basically had an image recognition technology of AI searching for pictures of cats and dogs. We also had another website that basically said, is this human real? Is it a real human or an AI generated? Then you fast forward to 2022 with the public release of chat GBT. And at that time period, you had chat GBT doing a lot of search functionality, which could replace, for example, your major search engine like Google. And then we had the deep seek reasoning models where the AI could think. So you could actually submit a question, and the AI would think and come up with a solution. with a solution. It wouldn't come up with it immediately, but it would think and come up with a little elaborate solution. Where the puck is going in the future is we're going to have an era called a "genetic AI" where you basically have a bunch of digital robots doing the work of humans. So the broader implication here is each AI agent will use more compute, more memory. So we're entering an era where there's a higher fidelity of intelligence. It's the small things that make us Canadian. At Bimo ETFs, all of our tickers start with Z. That's right, Z, not Z. From ZSP to ZEB, we know how to build solutions for the Canadian investor. So the next time you invest in ETFs, consider AZ instead. Visit BimoETFs.com for more. Jeremy, you have this saying within your team, if you don't go, you don't know. I think there's a very unique thing about you and your team, so why don't you tell us about that story? The Bimo Global Equity team has a saying, if you don't go, you don't know. Part of our underlying focus from an investment analysis perspective, we believe that we're going to get more insightful information and can make faster investment decisions the more we know about the company. But in order to get an informational vanages, we have to travel. We have to develop relationships with the management teams of the global technology companies. Every year, I go to Asia for five weeks, two separate trips. And during this time frame, I meet with local technology investors. I meet with the global supply chain and all of the companies that are building the intricate components of the iPhone to these AI servers. And I actually attend industry conferences. So look, every year, I attend the Computex trade show. A couple of years ago, this was the global launch of Nvidia's Blackwall server. I wasn't one of the first investors to see the server. I was one of the first people in the world to see the new AI server. So this time around, again, there was a lot of focus on PCs and AI servers. And there was tons of investment implications out of this. But from a high level here, it's just not me. It's the whole global equity team that really pounds the table and really does deep dive due diligence to really separate ourselves from our competition here. Yeah, that's a really unique part about your team. You're all sector specialists and you go very deep into the sectors that you each manage. Jeremy, this trip or last trip, was there anything that really stood out for you that made a difference for you being there in person versus maybe just reading a research report? The main difference of actually traveling and seeing the products at first glance is because the technology innovation cycles are so fast. If I'm sitting at my desk, nine times at a time, I'm going to miss that inflection point. I basically seeing and getting integrated to the community, it gives me a higher degree of probability that I'm going to get the trade right. So my last Asia trip and basically came to a conclusion that the memory sector was at an inflection point. And I made the call that there was going to be a structural supply demand in balance and we're going to see higher prices. What I can tell you from this last trip, that same thesis is going to continue and it's going to continue into a super cycle. So the new news, this time in this trip around was that the hyper scalers, the Amazon's, the meta's, the Googles, are very nervous in respect to getting supply. So what they have done is they've reached out to the AI supply chain specifically to the memory companies and they've signed long-term agreements. So in the past, there was no long-term agreements and the price was quite volatile. What we have today is the hyper scalers are going to actually prepay or have a long-term contract to the memory suppliers. With this allows, it allows for people in my seat to look at the industry different and to value the industry different. So what's going on from the stock perspective to separate from what's going on the industry, you know, investors are going and can value the memory sector from a price to book perspective, or a price to earnings perspective. Why? Because now the memory companies are making a 70 to 80% margins. They're locking in high margins three to five years. From this profitability, we're going to lock in these high margins and can value these stocks at a much higher valuation premium. Jeremy, we alluded to this earlier, right? When investors really think about AI theme, I think they really focus on the hyper scalers, few household names like Amazon, Google, and video, but which parts of the AI ecosystem do you believe are really creating the most value today? If you remember the first concept of our AI investment framework, you want to invest in the AI infrastructure layer, like the hardware, semiconductor layer first, followed by software. So right now, in respect to this AI cycle, it's all about AI hardware and infrastructure. So let me take a step back and tell you what's going on respect to the spending environment. So in aggregate, the global hyper scalers are spending roughly $900 billion annually. Why this is important is because if I think back six months ago, the consensus estimates were for 2026 hyper scaler cat bags to grow 600 billion. And what I just told you is like after Q1 earnings season, they're going to grow close to 900 billion. What's the differential outcome here? So what it comes down to is there were really two drivers that drove the upside. One is inflation and two is an increasing capacity. So when we think about the inflation complex, I told you that one area that we are heavily invested in is the memory sector. And what I can tell you from the September timeframe until today, the memory prices in respect to DRAM and NAN have gone up roughly seven times. So if you have a price of a component and memory, move it up seven times, you have higher labor costs, you have higher energy costs because of the war, that drove up a good portion of that incremental 300 billion. The other aspect is that all the hyper scalers believe that there's an all in arms race to develop AI. And they want to increase capacity. So net net, you come up of a value of 900 billion dollars. But the most important fact here is where is the money going? Where the money is going is to the AI supply chain. So what we have quantified is that if you add up the free cash flow of the top memory companies and video Broadcom TSMC, you get to an amount of roughly 900 billion dollars. So what we see is a great transfer of wealth from the hyper scalers that are spending this billions of dollars in AI cat-backs to the AI supply chain. And why this is important and get a lot of question is the growth sustainable, right? I can tell you that, you know, directly cat-backs is going to go higher, but you know who I believe? You know why I listen to? I listen to Jensen Wong, the CEO of NVIDIA. He believes that AI cat-backs in 2030 is going to be three to four trillion. If Jensen is right, that free cash flow for that AI supply chain is going up three to four times. And what we're going to see with the global hyper scalers is their free cash flow is going to zero and it's going to go negative. So when I sit back and think about my AI frameworks, where do I want to be long? I want to be long the companies with the AI supply chain because they're the biggest beneficiary of this cat-backs build out and they're at record margins, they're at record free cash flow. Those numbers, it's hard to wrap your mind around three or four trillion dollars of cat-backs. I mean those are just phenomenal growth in the space, but that said, are there any particular areas that you feel were investors maybe overlooking within the AI supply chain? I've not a bunch of marketing sense my Asia trip. Naturally, investors want to gravitate to the biggest names in the world and the biggest names in the world are the hyper scalers. And unfortunately, unfortunately, they represent the largest portion of the index and not just the tech index, just the general indices, like for example, the S&P index. So having the background within technology, meeting the companies on a regular basis, traveling to Asia, what I can tell you, what sector is overlooked is the AI supply chain. Look, a lot of the names have gone up materially, but what I will say is where I want to stand is I want to be roughly underweight the Meg 7, and I want to get exposure where the money's going and that's the big AI companies in the AI supply chain specifically. And when I think about investing in technology within this AI tailwind, you just can't mess blindly in all technology because your free cash flow is going zero or negative with the Meg 7. In respect to the software sector, it's going to be disruptive. Look, if you You remember back in February, Anthropic. Anthropic is one of the large language models. They came up with a press release almost every week. Anthropic wanted to disrupt legal, tax, education, cyber security, and what happened? Stocks in those sectors were down double digits after the announcement. So it's really hard to have confidence that I'm going to invest in software longer term because of the potential destruction. What has happened is those multiples have basically compressed significantly. Where we want to be is where is the money flowing to? Comes back to the AI supply chain. You want to invest in those companies that are trading at low valuations and at record margins. Jeremy, let's stay on that for a little bit longer. You're talking about cash flow. It's tricky though because technology evolves quickly and then we're talking about some companies that maybe have future earnings. So how do you and your team think about evaluating these companies, especially when their biggest opportunities maybe years away? I think our competitive advantage, which I mentioned before, is our on the ground research. My partner, Malcolm White, has gone back to school. He's done a bachelor's degree, now a master's degree in AI. He's our champion leading the way. I travel twice to Asia. I travel to the US. I basically map out what's going on the supply side, the guy supply chain, and mapping out what's going on the demand side by seeing the US companies and the biggest hyper scalers in the world to get a view. What we also do is we do a lot of work on the private side. What's coming out in respect to private companies and their solutions and why this is important is because, remember, the anthropic example. So we all know about anthropic. It's a competitive open AI and chat GPT. But what you may not know is the economics they're generating. So I put on my forecast three to five years, what does change? If I look back 18 months, January of 25, anthropic roughly generated a billion dollars of annual recurring revenue. Fast forward to May of 2026, anthropic has generated $47 billion of annual recurring revenue. I've seen a lot of companies in my career, but not many companies have gone from one to 47 billion in 18 months. So that gives me confidence that the world can monetize AI. Because again, the biggest debate within tech is are the hyper scalers going to continue to spend the billions of dollars, not even the trillion dollars of catbacks. What I can get in conviction on is basically the alphabets, the Googles, the metas of the world, the amzole world are getting the return. You can't see it. But what you can't see is the returns anthropic is getting. So when I look at three to five year framework, again, we're looking at private companies, we're looking at public companies, and we're seeing what is the biggest outcome of AI. And if I was to run an analogy of Apple, let's go back to 2007, 2008, we just use our iPhones to basically send texts and emails and make calls. But you fast forward to 2010, 2012 and on, we spent the majority of our time playing games, ordering food, ordering rides, our phone. So that's the perspective and the lens that we use from looking at AI. There's going to be billions, if not trillions of dollars, a new market cap from new native AI companies. And there's going to be a lot of innovation from the existing companies. Jeremy, you touched on this with Hilly earlier, but every episode it feels like we somehow talk about AI, whether it's mangoes now or the Meg 7. So what would you say to people still interested or caught up in buying these mega cap companies? I know you talked about the supply chain, but let's hone in on that a little bit more. I think the best advice that I could give, you have Malcolm myself with over 20 years of experience, managing technology. The best recommendation is to lean on portfolio managers like ourselves to do your tech work. It's not a do it yourself sector. Innovation, innovates extremely fast. The product cycles are fast. It's a volatile stock market and we have the right tool for the right job to generate alpha and compound our assets and your money over time. Yeah, what has been predominantly a perceived passive sector, you're saying it's very important to have an active approach here and we can see why. In addition to just having that active approach and being on the ground to your point, it's not one where you just want to pick one or two stocks and let that ride, right? So you want to invest with active management and take advantage of AI story. Obviously, a lot of great reasons believe it's not at the end yet. We've got much runway ahead of us. So for someone listening and who's really excited about this opportunity, how can they get exposure to that theme in a more professionally managed portfolio? I work for the BMO Global Equity team. The BMO Global Equity is we run a sector specialist model. So I, in my partner Malcolm, run the technology communications sleep. We have a financial PM. We have an industrial PM. So from an aggregate perspective, like one easy solution is investing in the BMO Global Equity Fund. The other alternative, if you want higher exposure to innovation, we have the BMO Global Innovators Fund or ETF. And that's the one I co-manage with Malcolm White. And that's the fund that has an amazing track record is compounded, like you guys said, well into 30s over the last three years. Yeah, that's great. I mean, the BMO Global Innovators, I think Zayl, I mentioned it earlier, compounded over 38% over the three year annualized period at the end of May. For those interested, the ticker for the Global Innovators is ZGIN. You also mentioned the BMO Global Equity. Obviously, these ideas would flow into that as part of this tech sector specialist. That ticker is ZG EQ. Okay, let's finish with a rapid fire question for you, Jeremy. We can't let you off too easy for today's episode. So one technology trend investors are not paying enough attention to. There's going to be a ton of innovation in agentech AI. Agentech AI. Okay, second question. One company characteristic you're always looking for. I want a CEO or senior management team to make unconventional or moonshot bets. Okay. Biggest misconception about AI investing. You or valuation will lead you to the right stock. And last one, one word to describe the next decade of technology innovation. Intelligence. Fabulous. Thank you so much, Jeremy, for joining us today. It was great to have you. Thanks for having me. This was great. As always, thanks, everyone, for joining us today. Stay tuned for next week. We're going to have Bip and Rye, our head of ETF and alternative strategy. And he's going to talk to us about his views for the Q3 economic and macro outlook. The viewpoints expressed by the portfolio managers represent their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. 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