By Barbara Kollmeyer

Stephen Yiu lines his fund with recipients of AI investments

Invest in the companies that are receiving artificial-intelligence investments, says the Blue Whale Growth Fund's Stephen Yiu.

Investing in the artificial-intelligence trade takes nerves of steel these days, with ever-cloudy visibility into whether all the money being invested will ultimately pay off.

A far simpler way to approach that complicated trade is to just "follow the money," says Stephen Yiu, the lead fund manager of the Blue Whale Growth Strategy.

"Where's the money going? That's the question you have to ask. And then you try to position into companies that are going to receive that spending," Yiu, also chief investment officer and co-founder of Blue Whale Capital, told MarketWatch in an interview on Wednesday. "For the AI spenders, what they're trying to do is spend the money first, hoping that they will make the money back later if they're successful in AI, but that's not a given."

Yiu's London-based fund is packed with global semiconductor-industry players on the receiving end of those investments - Applied Materials (AMAT) and Dutch-based BE Semiconductor (NL:BESI) at the No. 1 and No. 2 spots, with SK Hynix (KR:000660), Lam Research (LRCX), Lumentum (LITE), Nvidia (NVDA) and Sandisk (SNDK) also in the top 10.

Since its 2017 inception, the Blue Whale fund has seen annualized net-of-fee returns of 19%, beating a 12.4% comparable return for its MSCI World Index benchmark, he said. The bottom-up, research-driven fund has nailed early investments and timely exits around the AI trade.

At its start, the fund owned nearly the entire software complex - Salesforce, Adobe, Microsoft, etc,, said Yiu. While that trade worked for a while, a complete exit in 2024 saved investors from the selloff that was to come. He recalled shouting "AI disruption" from the rooftops about software but said few investors seemed to understand it at the time.

The fund was early to Nvidia (NVDA), buying in 2021 and holding on during a bumpy 2022. The fund's early 2025 investment in SK Hynix was also well-timed - the Korean memory maker's shares have surged 685% in a year.

In 2024, the Blue Whale fund picked up Vertiv (VRT), which makes liquid cooling systems for AI data centers, along with Broadcom (AVGO), then Lumentum, the maker of optical interconnects for AI data centers, late last year.

Yiu acknowledged that Nvidia, whose shares are up just over 5% this year, has fallen out of favor. He said he blames it on unrealistic expectations for Nvidia as well as Broadcom, whose shares have put in a similar performance this year, to keep delivering the blowout rates of return seen over the past two to three years.

"You cannot expect Nvidia is going to become a $10 trillion company within two years. It might get to $10 trillion, but it would take some time."

But, to him, Nvidia's valuation remains attractive, with a forward price-to-earnings ratio of around 22 times, net cash on its balance sheet and heavyweight customers. "When you look at the earnings trajectory it's not stopping at all," yet Nvidia continues to get cheaper.

Apple, by contrast, has a price-to-earnings multiple above 30 while revenue isn't growing.

"I think we are [in] the very early journey of the AI development or innovation, hence I think there's still going to be a lot of demand for [graphics processing units]," he said.

Yiu's fund isn't invested in the big hyperscalers, outside of Alphabet (GOOGL), which it picked up this year on the view that it's "trending" in the right direction to be a future winner, with its sophisticated AI model, Gemini.

He said the fund passed on SpaceX (SPCX), whose valuation "has too much of a premium on Elon Musk's magic touch" and will probably be loss-making for the next three years if not longer. He believes OpenAI and Anthropic will also be "too expensive" for the fund they eventually come to the market, he said.

Yiu weighed in on the debate around memory, saying he sees that part of AI infrastructure as "the most long-lasting."

"The way we understand this is we are going to see a mega-explosion of data and content generated by AI," he said. That will need storing, with increased personalized data and ads also ramping up content, he said.

Apple's (AAPL) recently raising prices on some products is proof of just how important memory is to the industry, he said. If an investor believes AI is here to stay, then memory prices are bound to keep rising.

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are turning higher, oil (CL.1) (BRN00) is dropping and gold prices (GC00) are climbing, with U.S. jobs data just released.

Key asset performance Last 5d 1m YTD 1y S&P 500 7483.23 1.70% -0.93% 9.32% 20.17% Nasdaq Composite 26,040.03 2.21% -3.03% 12.04% 27.69% 10-year Treasury 4.498 10.30 1.70 32.60 14.70 Gold 4078.8 0.92% -9.41% -5.85% 22.27% Oil 67.5 -5.55% -27.35% 17.58% 0.49% Data: MarketWatch. Treasury yields change expressed in basis points

The buzz

The U.S. added 57,000 jobs in June, about half of what was expected, while unemployment fell to 4.2% from 4.3%.

Weekly jobless claims fell 1,000 to a revised 215,000, below expectations. Factory orders are due at 10 a.m.

Google (GOOG)( GOOGL) just lost an 8-year battle with the EU over a $4.68 billion antitrust fine.

OpenAI is reportedly in talks to give the U.S. government a 5% stake.

The bond market is due to close early ahead of the federal holiday on Friday.

SEC probes alleged insider trades that cost Susquehanna millions.

The chart

The chart from JPMorgan shows how hyperscalers have struggled versus semiconductors since last September. Strategist Nikolaos Panigirtzoglou and his colleagues say that unsustainable gap will will start to close if hyperscalers and AI-model providers and users see improved monetization and start to capture "a bigger share of the overall AI value-added pie." They warn, though that if analysts' expectations for a sharp deceleration in hyperscalers' capex trajectory from 2027 proves right, "the semiconductor trade could come under severe pressure inducing a more significant and sustained correction in the AI trade in both equity and debt markets."

Top tickers

These were the most searched ticker symbols on MarketWatch as of 6 a.m.:

Ticker Security name TSLA Tesla MU Micron NVDA Nvidia SPCX SpaceX AMD Advanced Micro Devices TSM Taiwan Semiconductor Manufacturing MU Microsoft PLTR Palantir GME GameStop META Meta

-Barbara Kollmeyer

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