Alger CEO Dan Chung: This year is an extraordinary buying opportunity for a patient investor

Key Concepts

• MAG-7: Refers to the seven largest US technology companies (likely Microsoft, Apple, Nvidia, Google/Alphabet, Amazon, Meta, and Tesla).
• CAPEX: Capital Expenditure – funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, and equipment.
• Free Cash Flow (FCF): The cash a company generates after accounting for cash outflows to support its operations and maintain its capital assets.
• Crossing the Chasm: A concept in technology adoption describing the difficulty of moving from early adopters to mainstream markets.
• AI Adoption: The increasing integration and use of Artificial Intelligence technologies across various industries.
• Semiconductors: Electronic components crucial for computing and data processing.
• Healthcare AI: The application of Artificial Intelligence in the healthcare industry, including drug discovery, clinical research, and healthcare delivery.

The Current Market & MAG-7 Under Pressure

The discussion centers around the recent pullback in the market, particularly affecting the MAG-7 stocks. Dan Shang, CEO and CIO of Alger, argues this decline is driven by fear rather than fundamental issues. He maintains a positive outlook, believing the market is still in the early stages of a significant build-out phase, especially concerning Artificial Intelligence (AI). Recent earnings reports from these companies were strong, with the primary “negative” being increased capital spending (CAPEX) to support AI infrastructure development. Shang views this CAPEX as a necessary investment, drawing parallels to Amazon’s early build-out phase. He acknowledges the classic “crossing the chasm” problem – the delay between investment and profit realization – but remains optimistic due to accelerating AI adoption and productivity gains across the economy.

CAPEX & Future Free Cash Flow

A key point of contention is the substantial increase in CAPEX by major tech companies (Microsoft, Amazon, Google) – ranging from 60% to 100% increases. Some argue these companies should refocus on cash flow, but Shang believes this is unlikely in the next two years. He posits that if CAPEX rationalizes around 2028, the market will begin pricing in the significant free cash flow (FCF) that will revert to shareholders. He suggests the market typically anticipates such shifts, potentially starting to reflect this in 2027. This creates a potential buying opportunity for patient investors, as the current market conditions may not fully reflect the future FCF potential.

Quote: “The typical stock market answer is the market looks ahead. So probably certainly in 2027 they’ll be looking at you know really interesting return to free cash flow growth from admittedly very low levels right now because they've been spending it.” – Dan Shang

Software vs. Hardware & Infrastructure

Shang highlights a divergence in the tech sector. While software is facing potential disruption due to AI’s ability to automate software creation and lower production costs, challenging existing business models, the infrastructure supporting AI – semiconductors, data centers, cooling systems, and semiconductor equipment – is performing exceptionally well. He notes the significant outperformance of these infrastructure stocks compared to software, a dynamic not seen in 20 years. The ongoing memory shortage, potentially lasting into 2026 or 2027, provides a timeframe for patience in stocks like Micron and Western Digital, allowing for potential pullbacks to create buying opportunities.

Sector Rotation & Healthcare as an Opportunity

Shang suggests exploring opportunities outside of tech while the market assesses the return on current CAPEX investments. He specifically points to the healthcare sector, which has underperformed for several years, experiencing difficulties in the first half of the previous year due to policy changes. However, he believes healthcare is poised to benefit significantly from AI applications beyond drug discovery, including clinical research, healthcare delivery management, and insurance pricing. He views healthcare as a non-economic sensitive growth area with substantial innovation potential.

Quote: “Right now we think, you know, healthcare has some interesting opportunities that investors should be looking at.” – Dan Shang

Western Digital & Investment Strategy

Alger currently holds a significant position in Western Digital and intends to maintain it. While a current purchase is considered less opportune, Shang advises looking for pullbacks. He doesn’t explicitly rank healthcare as second only to tech, clarifying that they still maintain a strong liking for the tech sector.

Logical Connections

The conversation flows logically from a broad market overview (MAG-7 pullback) to a deeper dive into the underlying drivers (CAPEX, AI adoption). It then branches into a sector-specific analysis, contrasting the challenges in software with the strength of hardware and infrastructure. Finally, it concludes with a strategic recommendation to consider sector rotation, highlighting healthcare as a potential beneficiary of AI and a compelling investment opportunity.

Data & Statistics

• CAPEX Increase: Major tech companies are increasing CAPEX at a rate of 60% to 100%.
• Memory Shortage: Predictions suggest the memory shortage may not be resolved until 2026 or 2027.
• Software Golden Era: Software has experienced a 20+ year period of strong performance.

Synthesis/Conclusion

Dan Shang presents a cautiously optimistic view of the market, arguing that the recent pullback in the MAG-7 stocks is a temporary reaction driven by fear rather than fundamental weaknesses. He emphasizes the long-term potential of AI and the necessary CAPEX investments to support its growth. He advises patient investors to view current conditions as a buying opportunity, particularly in infrastructure-related stocks. Furthermore, he suggests diversifying into sectors like healthcare, which are poised to benefit from AI innovation and offer attractive growth prospects. The key takeaway is to focus on long-term fundamentals and recognize that the current market volatility may present opportunities for strategic investment.