AI use cases don't have to be explained: ETF expert

BNY Mellon's Innovators ETF is investing in a range of tech companies tied to artificial intelligence. John Porter, Newton Investment Management CIO and Head of Equity, joins Yahoo Finance Live to discuss Nvidia's role as the center driver in AI trends and whether reports of U.S. crackdowns on Chinese chip stocks can dampen higher moves for semiconductor manufacturers.

Video transcript

SEANA SMITH: Well, chipmaker Nvidia falling today on a Wall Street Journal report that the US is considering new restrictions on AI chip exports to China. We're looking at losses of just shy of 2%. While Nvidia stock has certainly been riding the AI wave since the start of the year, hitting a trillion dollars in market value last month. So what does the US crackdown on China mean for tech and tech innovators?

Joining us now for this week's ETF report brought to you by Invesco QQQ, we want to bring in John Porter. He's the chief investment officer and head of equity for Newton Investment Management, a BNY Mellon Investment firm. He's also portfolio manager for BNY Mellon's Innovators ETF. John, it's good to see you here. So lots of focus on the news today for NVIDIA. What exactly this means for tech innovation in the US? Since you're portfolio manager of your tech innovators-- of your innovators ETF, how are you looking at this from a portfolio management perspective?

JOHN PORTER: Absolutely. And if there's any animals in the background, please let me know, because there shouldn't be any. I think this is-- look, this is-- every day, there's headlines you need to consume. And this is certainly news that we have to analyze. And there's obviously a lot of political cross-currents between the United States and China. And China is an important market for Nvidia, we can't ignore that. It's somewhere approaching 20% of their revenues.

I think right now, the news that there may be additional crackdowns on China is largely a non-event for the Nvidia PnL right now. Demand for NVIDIA chips is so strong right now. There's such a backlog of companies. They're desperate to get their chips, which are the key building block to build out AI capabilities. I really don't think this news is material for Nvidia.

JARED BLIKRE: Let me ask you then, just maybe looking a little bit further into the future and just acknowledging the fact that this AI bubble is in a nascent stage. And we tend to see these things come in waves. I'm reminded by the Bitcoin and the blockchain revolution, particularly late 2017 or early 2018, when Bitcoin finally rose to 20,000. There was all kinds of excitement about that, too. And Nvidia was actually building up their chip inventory. They got caught with a glut. I know we're not at that phase yet. But do you see us approaching a phase where really the chip market could be a pawn in the AI bubble?

JOHN PORTER: Jared, that's always a question that investors have to ask themselves, particularly with regards to tech. There's always a hype cycle that can get well ahead of the business realities. And I like to compare and contrast this, like you did, to Bitcoin cryptocurrency, the metaverse, and other things.

I think the difference here is the use case is clear. I think in the early days and maybe even still currently for cryptocurrency and to some extent the metaverse, the use case is still trying to be explained. The use case for AI is very clear. You're not ever going to convince governments or corporate America how AI can help improve the productivity of their businesses of their endeavors. So I think that's one of the major differences here.

SEANA SMITH: John, how are you looking at valuations overall? Because it's not just Nvidia. Alphabet, I believe, is also one of your top holdings. That has had a big run up since the start of the year. Any concerns in terms of the valuations and what exactly that could look like for some of those top holdings that you have?

JOHN PORTER: Absolutely. You always have to be mindful of valuation. And you talk about the hype cycle, you need to weigh sort of where the equities are priced relative to what the business potential is. Nvidia is an interesting one to look at. It's trading at somewhere around 45 to 50 times consensus earnings, which is well above average for the market.

But considering their growth rates, considering how there are critical building blocks for AI, which I think is one of the most seismic changes to the economic landscape that we've seen in decades, I don't think it's prohibitively expensive. It's fully priced. Don't get me wrong. But I think given the growth rates, given how indispensable Nvidia is to AI, given their competitive leadership position over all the other chipmakers, I think that you can make the case that the Nvidia valuation makes sense.

And for many of the other mega-cap stocks, they've had a very nice run year-to-date. But if you step back, the vast majority of them are trading somewhere between 20 to 30 times earnings. And considering the amount of money they're pouring into future growth endeavors and the growth potential that they have, I think that they're reasonably valued.

SEANA SMITH: And leaving the AI discussion to the side for a minute, if that's possible, I'll give you the floor, what other factors are you considering challenges, tailwinds, whatever, within the current market environment?

JOHN PORTER: Well, I'm a stock picker, but you can't ignore the macro landscape. I think that the surprise this year, positive surprises this year has been the strength of the economy. And that's something that has been a very pleasant surprise for many investors. But you still have to be a little cautious about what lies ahead. Investing is about discounting the future. And there's still I believe a lot of risks to the economy from the cumulative effects of the rate hikes that we've seen yet to be fully felt but I think could rear its ugly head over the coming months. So that's something to monitor.

On the positive side, I would just speak to innovation broadly. One of the things that we're seeing is the powerful impacts of innovation in every corner of the economy is unlocking growth potential in individual companies that we think is underappreciated in the market. And that's what this portfolio, the BNY Mellon Innovators fund is trying to take advantage of.

SEANA SMITH: All right. John Porter, thanks so much for your time. No animals this time in your background. We got to wait until next time.

JOHN PORTER: Yeah.

SEANA SMITH: All right. Thanks so much for joining us. We'll talk to you again soon.