Gavin Baker: A Leading Tech Investor
Gavin Baker, who serves as the chief investment officer at Atreides Management, has made a name for himself as one of the most notable tech investors today.
During his eight years managing over-the-counter portfolios at Fidelity, he delivered more than 19% annual compounded returns, outpacing 99% of his peers according to Morningstar.
At Atreides, Baker is currently in charge of approximately $7 billion in both public and private investments. His specific returns aren’t fully disclosed, but Tipranks reports a Sharpe ratio of 2.46 for him, indicating he achieves impressive returns while minimizing additional risk.
Additionally, Baker shares his thoughts on social media, providing insights into how to evaluate AI stocks.
On the All-In podcast, he referred to the AI sector as “cross-sectionally inefficient,” emphasizing how the valuation multiples within this area don’t necessarily reflect each other accurately.
He notes that stocks like Micron and SanDisk are currently quite affordable. Baker believes Nvidia also has a low P/E ratio.
In contrast, he highlighted that stocks related to power, cooling, and optical technologies have considerably higher multiples. For instance, Lumentum Holdings, which makes optical chips, has seen its stock price explode—up tenfold compared to last year—with P/E ratios soaring into the triple digits. Coherent, another optical stock, is in a similar situation.
Baker concluded that if the high multiples for stocks like Coherent and Lumentum hold true, then both Micron and Nvidia could see significant stock price increases. However, inversely, if the valuations for Micron and Nvidia are justified, these other stocks might underperform.
Is There Just One AI Cycle?
Baker theorizes that there is a singular AI cycle influencing all these stocks. This suggests that optical stocks are linked to memory stocks like Micron. If the boom in AI continues, investment prospects appear strong, but the fallout could be severe if the trend reverses.
Investors are cautious, given the cyclical nature of memory chip stocks, where prices can swing dramatically between excess supply and shortage.
This cyclical behavior is something seen across the semiconductor industry, including optical chips. Yet, AI has propelled these stocks to new heights, making historical patterns less applicable. Some suggest this might signal a longer-lasting boom, though shifting supply and demand could lead to a steep downturn.
Smart Investing in AI Stocks
While momentum could take precedence over valuation in the short run, valuation tends to matter in the long haul. This means less expensive stocks might hold an advantage. For example, Lumentum’s stock trades at a far higher price compared to Micron and Nvidia, yet it’s not exhibiting fast growth.
Last year, some of Lumentum’s gains resulted from business expansions, a benefit not seen with Micron, whose valuation has actually decreased.
Baker advises that the savvy approach to investing in AI stocks involves targeting undervalued options like Micron and Nvidia, while steering clear of stocks like Lumentum that have relied more on multiple expansions for their growth. If the whole AI sector reacts either positively or negatively, well-priced stocks should perform better than their pricier counterparts over time.
