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Tom Lee, who co-manages the TCW Artificial Intelligence Equity fund, thinks owning stocks of companies using A.I., such as Domino's Pizza, can be just as important as owning the makers of A.I. technology such as Nvidia.
Is Domino’s Pizza (DPZ) an artificial-intelligence company?
You might not think so, but it smells like one to Tom Lee, who helps manage the Artificial Intelligence Fund (TGFTX) for TCW, the $200 billion-in-assets fund giant, from his offices in L.A.
Lee has a mandate to find 50 to 60 stocks that might be able to post outsized investment returns, or alpha, by developing or using artificial-intelligence technology.
“Domino’s is one you wouldn't think of as an A.I. company,” Lee said in an interview Thursday, noting that the company has spent five years bulking up on technology.
"Millennials love" the Domino's pizza-ordering smartphone app, Lee said.
Users can check the app to see, for example, just where their pie is on the journey from oven to final destination. But is that A.I. or simply smart software?
The connection is that the company is developing technology to automate future deliveries, drawing in partners such as Ford (F). The bet on Domino’s is a bet that in years to come, “autonomous” deliveries of pizza will help the company further gain share from competitors such as Pizza Hut, a division of Yum Brands (YUM). “They’ve differentiated themselves with tech, and the next stage is automation,” Lee said.
Domino’s is an example to Lee of how increasing numbers of companies are becoming users of A.I. It’s a way for Lee and his co-manager, Jeff Lin, to cast a wider net, given the paucity of true “pure plays” in A.I.
“There aren’t a lot of pure plays; you could argue Nvidia (NVDA) is really the only one,” said Lee, who once upon a time was an engineer on smartphones at Motorola’s Schaumberg, Ill., facilities.
Arista Networks (ANET) might be the only other pure play, in his mind, because it builds the connections inside cloud data centers that make possible all the A.I. data crunching by Alphabet’s (GOOGL) Google and others. Lee owns both Nvidia and Arista.
Veterinarians and robots
Along with Domino’s, his less-obvious picks include Idex (IEX), the maker of medical devices. The company has a diagnostic system for veterinarians that can take in lots of images of urine samples and save time doing an animal’s urinalysis. Intuitive Surgical (ISRG) is another stock he owns. “You could say they don't deliver A.I. yet, but the next step once you have surgical robots in the operating room is to bring various levels of A.I. to those systems,” he explained.
Although it is “early days” for such bets, Lee is convinced A.I. leads to rising sales and profit and, ultimately, alpha for investors. TGFTX is up almost 7% this year, compared with the Russell 3000’s 3% decline. Lee’s U.S. fund just got started in September, with $1.6 million. But an earlier version for Japanese investors, begun in 2016, was started with $80 million and has swelled to $1.6 billion in assets under management.
Keeping up with the trends
When scouting ideas, Lee scans the A.I. terrain in a variety of ways, including meetings with startup companies and academics pushing the boundaries in the field. Lee described a recent visit to professor Hod Lipson of Columbia University, co-author of the book “Driverless: Intelligent Cars and the Road Ahead,” from MIT Press.
He relates how a couple of Lipson’s grad students have been using A.I. to crunch geological data to detect the potential for earthquakes in Southern California - of particular interest, it would seem, to a fund manager in the L.A. area.
Lee isn't averse to holding stocks of companies going head to head in A.I., including both Nvidia and Intel (INTC).
He likes Nvidia more than ever after attending the company’s “GTC," or GPU Technology Conference last week. Like others, he’s impressed with Nvidia’s lead in software to program GPUs for A.I., called CUDA. “It makes the platform very sticky,” he said.
“Nvidia seems expensive on current numbers, but the ‘E’ in the P/E is probably too low the way it’s being modeled,” he said.
Intel is worth a bid
In the case of Intel, “the concerns on the Street are reflected in the multiple,” Lee believes. While Intel might lack the potential for enormous growth, “it has a sustainable franchise and it doesn't need to grow at the same rate as Nvidia," he said.
The negative sentiment toward Intel is similar to the negativity aimed at Cisco Systems (CSCO) a few years ago. “As with Cisco, you just needed to see the core business be stable," he said.
Lee doesn’t short stocks, but willingly passes up on things that might seem like A.I. to others.
IBM isn't an A.I. pick
International Business Machines (IBM) is a stock he doesn’t own, despite the fact that “they have a very strong A.I. narrative” with products and services such as Watson. “But it’s one where it doesn't translate to the bottom line," Lee said
IBM’s other businesses, meanwhile, are “a Titanic that's hard to shift," he said.
A trend for the ages
The return of volatility looks to have ended what Lee called an "auto pilot market" in stocks. If the stock market remains volatile, he anticipates that some investors will embrace active money management again, moving out of exchange-traded funds that mirror various stock indexes.
A.I. has staying power, he insisted. “I think it's at least as strong as the tech revolution of the 1990s, and it could be more powerful," he said. "I like to say we’ve not seen anything like this since the industrial revolution.”
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