The economics of the AI companies is being tested with Alex Pollak | Loftus Peak

**Alex Pollak** (0:00)
If you remember, the first three years were marked by a lot of bubble talk. Well, now everybody's using it.
So the idea that it's just a bubble that will go away, that seems to have gone. That doesn't mean that there aren't genuine financing challenges. The question now is, is that spending commensurate with the size of the opportunity? And honestly...

**Ren** (0:23)
Welcome to another episode of Equity Mates, a show that helps you explore what is possible in the world of investing. My name is Ren, and today it's just me, Bryce is finishing up his holiday, and today we're talking all things global disruption and big tech. Because it's a fascinating moment to look at the state of the AI race. On one hand, we have a flood of spending from big tech that doesn't really show any signs of slowing down. This year alone, the big tech companies are expected to spend $800 billion on AI data centers. Google or Alphabet alone is expected to spend $250 billion.
To put $250 billion US dollars in context, that would be enough to buy Coles and Woolworths four times over. But the spending isn't slowing down this year. Next year in 2027, Goldman Sachs estimate the big tech companies will spend $920 billion on AI data centers, and Morgan Stanley think it will be $1.1 trillion.
This flood of money has to go somewhere, and it's going to the providers of the chips and other infrastructure that go into a data center. So you'd think these companies would be having a great time. Over the past few years, they have. They've done incredibly well. But the past few months have been rocky. The semiconductor index is down more than 20 percent. It's in a bear market, and that's despite Big Tech continuing to ratchet up its spending commitments. I wanted to understand this moment. Why Big Tech is still spending? Are they still confident they're going to get a return on this investment when the Chinese AI models seem to be having a moment? And why are the semiconductor companies down when there's so much money heading their way? To unpack it all, I turned to Alex Pollak. He's the Chief Investment Officer of Loftus Peak, and their fund is focused on investing in disruption. They've captured the upside of this wave of tech innovation better than any other fund manager in Australia. Their fund's been operating for almost 10 years. It's delivered 21 percent return per year in that time, and it's beaten their benchmark by an average of almost 7 percent a year.
So I turned to Alex to understand what is happening in this moment and how we should approach it as investors. Before we get into the conversation, I want to say a massive thank you to Loftus Peak for sponsoring this episode and helping us keep all of our content free. But with that said, let's get to my conversation with Alex Pollak.
Alex Pollak, welcome back to Equity Mates.

**Alex Pollak** (3:06)
Thank you for having me. It's a pleasure to be here, Alec.

**Ren** (3:08)
I'm excited for this conversation because there's a lot happening in the world of AI semiconductors and high-growth technology, and I think you're one of the leading experts and investors in Australia, so no pressure, but I'm excited to understand it a lot better by the end of this conversation. The last three years, we've seen this cycle of higher AI spending, higher semiconductor profits, and higher share prices as a result.
But that's changed in the past month or so. The spending commitments are certainly still there, but the market seems to have started worrying about semiconductors. So give us just an update on where the market is and why the semiconductor index is down.

**Alex Pollak** (3:47)
The bubble talk, which is actually now most recently dispersed, now it's not bubble talk, now it's CAPEX talk. But if you remember, the first three years were marked by a lot of bubble talk. This will be gone in six months or a year, etc., etc. Well now everybody's using it. So the idea that it's just a bubble that will go away, that seems to have gone. That doesn't mean that there aren't genuine financing challenges. It's distinctly possible that companies are financially overcommitting to what the size of the proposition is. The question now is, is the spending to roll out the AI tools? And I don't just mean the GPUs, I mean the premises and the buildings themselves and the land and the power supplies, et cetera. Is that spending commensurate with the size of the opportunity? And honestly, nobody knows, not even Sundar Pichai or Satya Nadella or Andy Jassy knows the argument to that, knows the answer to those questions.