DialoguesFidelity : Actions américaines et valorisations

[00:03:50] Pamela Ritchie: Hello, and welcome to Fidelity Connects. I'm Pamela Ritchie. With U.S. retail sales numbers out stronger than expected it's clear that even in light of the tariff overhang consumers are still spending into the economy. Today, we're going to learn more about where growth stocks may be hiding in plain view across U. S. equity markets. Companies that often grow with long term structural themes, as well as those that are currently pumping out large amounts of free cash flow, fit this strategy. Aspects of the AI trade fold nicely into the growth outlook but which areas have the most untapped potential at this stage? Joining us to speak about growth opportunities across this market are Fidelity U.S. Growth Opportunities Class portfolio managers, Kyle Weaver and Becky Baker. Great to see you both. Welcome to both of you. How are you?

[00:04:41] Kyle Weaver: Great.

[00:04:42] Becky Baker: Great. Thanks so much for having us.

[00:04:43] Pamela Ritchie: We're delighted to have you here. I'm just going to remind everyone joining us that you can send questions in for Becky and for Kyle over the next 30 minutes, and, also, that this discussion is available in live French interpretation so do join us in either official language if you wish. Kyle, I might ask you to start us out here. We spoke with you several months back at this point and I'm curious sort of how different everything has been in light of market volatility, and then we're going to dig into the actual strategy itself. It's something we're asking people a lot right now. This has been a rocky road for markets, how's it been for the fund.

[00:05:18] Kyle Weaver: In the last six months, Pamela, it's definitely been a volatile period of time with a lot of ups and then downs and then ups more recently, writ broadly. The Liberation Day tariff madness was a big source of volatility in the middle of the period. It was actually around this time just three months ago that that was unfolding and companies were trying to give guidance in an environment of extreme uncertainty. I think since then we've seen both some return to maybe reason or normality in some areas and also the strength of some of the secular themes just continue to power through what's been a tumultuous environment. Becky and I have used that to try to double down on some of the positions that we feel very strongly about on a secular view while still keeping the fund kind of insulated from as many corner cases as we can think of when it comes to the macro uncertainty.

[00:06:39] Pamela Ritchie: That's fantastic. That's sort of what we wanted to hear about. Becky, I wonder, is there anything to add there? Has the fund done what it's meant to do through moments of, you know, you've been able to harvest that?

[00:06:51] Becky Baker: I think we are pleased with how the fund has performed year-to-date. I think we're up absolute and we're up relative to the benchmark. I think we're happy that during this period of uncertainty we were able to find secular growth stories that we think are underappreciated with a long term view and take advantage of the volatility while being very conscious of how dynamic the environment was and not taking unnecessary risks. I think we are happy with how the beginning of the year has gone.

[00:07:24] Pamela Ritchie: Kyle, let's jump into the AI trade and the many prongs, actually, that there are to this. We've spoken to you about this before. I wonder, just as a broad comment, what's different about your investing in AI today than, say, even at the beginning of the year? What's taken off from the way that you're looking at things?

[00:07:46] Kyle Weaver: That is a big question, Pamela, but I will say many of our largest bets are quite similar, which shouldn't be surprising to our shareholders since we try to invest with a long term view, always keeping in mind that we want to change our mind as the facts change. I think we've actually seen a lot of big public company bets and some of our smaller private investments really make the progress that we've been expecting them to make over the last several months. There are some emerging winners in the space and some companies that seemed small or just conceptual a couple of years ago now have real revenue and represent real forces in the industry. Some of those are private holdings and some of those are also legacy companies like IBM and Oracle that have been around for decades but that are seeming to capitalize on sort of new life being breathed into them from the developments in AI. It's a big topic and we can take it where you want it to go but I don't know, Becky, maybe you have some other thoughts on the...

[00:08:59] Pamela Ritchie: Well, I wanted to just pick up on a couple of things you said. I'll ask Becky one of these questions. This was a theme that you mentioned. This is the headlines that we keep seeing about trying to acquire talent, sometimes ideas. There's been an awful lot made about this. Becky, how are you looking at it, following the headlines? You're probably ahead of all of the headlines. I think it's sort of this acqui-hiring, the question mark is whether it's, yeah, is it worth it?

[00:09:27] Becky Baker: Acqui-hiring might have been a word that was new to my vocabulary as of a couple of years ago but it means acquiring a company or acquiring talent from a company because you're focused on that talent as opposed to some other assets from the company. We've seen that from a lot of the big tech companies that they're going to startups that are having various levels of success and acquiring some of the assets that they view as valuable from those companies but also taking founders onboard because they think the talent in AI is important enough that if they assemble the right team of players that it can make a difference in their AI efforts. We've seen acqui-hire type acquisitions from Meta and Google just in the past couple weeks and from Microsoft and others before that.

[00:10:15] I guess from where we sit this strategy does make sense. If you had asked me to predict who are going to be the winners in AI a couple years ago I might have said the big tech companies have enormous advantages because they've got capital, they've got distribution and they have a huge employee base, some of which probably has important talent or important expertise in AI that can help them. While those companies have done really well I think it's been an upside surprise to see the progress that some of the startups have made, whether that's OpenAI or Anthropic. These names are in the headlines every day because they've grown into really meaningful companies in this movement. I think the fact that those companies have been able to make such strong progress despite not necessarily having the advantages that their competitors have speaks to the importance of talent in this market.

[00:11:08] I guess the question from here is, is it easy to proactively identify who are the key people that are worth acquiring a company for that talent. There's been some headlines about $100 million signing bonus for key employees, are those types of numbers worth it because are you getting the right people? Obviously, the companies that are making these decisions think they are but that's something we're certainly going to be watching.

[00:11:32] Pamela Ritchie: Kyle, do you want to pick up on that? Take that anywhere you want because there are so many pieces in that. It's, obviously, a very exciting time for you watching this.

[00:11:44] Kyle Weaver: I think it helps to put it in context of the size of the investments that are being made overall, such that $100 million signing bonus for a unique talent in the space, it's easier to understand how that might make sense, I'm not saying that it does or doesn't, but how it might make since if the big three hyperscalers are spending hundreds of billions of dollars in one year alone on the GPUs to run these models you want the best GPU driver in the world to be running that to be in charge of such a large multi-hundred billion dollar set of investments. I think it kind of makes sense on that front. I think the dollars being spent on talent are synonymous ... they dovetail with big investments being made all up and down kind of the value chain for these companies as they build out their models.

[00:12:56] For example, even when you look at the energy requirements and the power requirements that are needed to provide electricity for these large models and the entrance capabilities, that's why you're seeing also some unique ... it's kind of like asking, hey, is it worth spending $3 billion to reopen Three Mile Island? Companies are also coming to the conclusion that, yes, we should reopen retired nuclear facilities in order to get electricity. There is a real race here. These are the sort of the best funded, best capitalized companies in the world that are involved in it.

[00:13:35] Pamela Ritchie: Can I ask you, Kyle, just a follow-up on that? Are we still talking about, are those still picks and shovels to the AI story? I mean, it feels like that was what we were talking about a year ago and the investments were there. It seems like a new stage. It's not just picks and shovels, there's more than that, but it's still an energy story, isn't it?

[00:13:55] Kyle Weaver: Yeah, I do think the energy story, which we do have represented in the in the fund in a few ways, mostly through the independent power producers, it's an interesting part because we initially came to it for some of the regulatory provisions that were favourable to the companies. We became more interested in it because of the AI angle and the additional demand that these large hyperscale data centres were going to bring to the electricity market. As we've come to know those names better the thesis has become almost even more structural in the sense that the U.S. hasn't really built a lot of electricity capacity in decades, and there's been a multi-decade shift of becoming more energy efficient, and it's a relatively new phenomenon to be in a supply constrained market which puts these companies that do have electricity that they're able to sell at prices that are needed to justify further investment in a really good position. I sometimes joke that this is one of the few examples of positive thesis drift where you kind of come to an idea for one reason and then you sort of find more and more reasons to believe in it as things go on. AI is certainly a part of the story but it's all in the context of a very kind of structural supply-demand story that I think will take years, if not longer, to sort of play out.

[00:15:39] Pamela Ritchie: You're right in the middle of it. It's so interesting. Becky, not long ago we've been hearing lots about all of the tariff discussions, the trade negotiations that have gone on, that are still going on, one of the big ones, obviously, between the U.S. and China, it seemed like commentators came to part of a conclusion that it wasn't actually so easy to just decouple from China because there's an awful lot going on in China that needs to actually work and perhaps work together with the U.S. One of the biggest companies in the world sort of went to bat for that thesis. I think it's something that you would follow very closely. What do you think of sort of AI between China and the U.S., the opportunities therein? Do you like seeing companies having exposure to the Chinese market, for instance?

[00:16:31] Becky Baker: I think I'll rewind a bit and just remind the listeners that U.S. companies had been selling AI infrastructure into China for a couple of years. The prior administration had decided that for strategic reasons we should limit our sales of the most advanced AI systems to China so that we could have a national security advantage and kind of keep the U.S. out in front. As a result of those restrictions Nvidia created a special purpose system for Chinese buyers called the H20 and they were allowed to sell this into China. It's a few generations behind what they're selling to U.S. and other global customers but it is still the best system out there. If you're subject to these restrictions you'd still rather have these Nvidia systems than anything else.

[00:17:18] When the Trump administration came in there was originally some optimism that they could get even more relaxed standards and Nvidia might be able to sell something closer to what they're selling in the U.S. Instead, we saw it go the other way. They were restricted from selling even the H20s that are a few generations behind into China. Last quarter they said they expected this ban to cost them about $8 billion dollars in revenue, this quarter they're about to report. They were very disappointed in that decision. I think the strong case that the company made about why these rules were actually not in the interest of the U.S. is that 40% of the world's AI researchers are in China.  As much as we might want to try to cut China off in order to keep the U.S. ahead it was gonna be very difficult to do that successfully because of the talent that's concentrated there and that it was actually in America's interests to have the best Chinese AI models built on American infrastructure.

[00:18:25] I think we saw a very strong argument for this when the success of the DeepSeek model became news. What we saw with DeepSeek was they were able to train their model more cost-effectively than U.S. companies had been able to and there were some other interesting realizations that they had when they were building their most recent generation of AI models. The positive thing for U.S. companies that developed from this was they were able to read the DeepSeek paper and take the learnings that DeepSeek released and apply them to their own models. We were talking to a lot of the private U.S. AI startups about how excited they were about what DeepSeek had discovered. I think part of the reason why this works so well is because everyone's running on the same infrastructure.

[00:19:12] I think we're happy as Nvidia shareholders to see this revenue opportunity come back to them but I think we're also believers in this idea that trying to cut China off, it may hurt them in the short term but it's unpredictable because you don't know what U.S. companies are going to learn from Chinese innovation. In the long term China is not going to give up on AI so if they can't buy Nvidia chips they're going to buy from somewhere else. If that's a local supplier it may be worse for the U.S. I think we were pleased to see these headlines, as I'm sure Nvidia was too, and we think they make a lot of sense for the country.

[00:19:49] Pamela Ritchie: Anything to add there, Kyle? I was going to ask you another piece but that's fascinating.

[00:19:53] Kyle Weaver: No, Becky, that was perfect. I just think that point about ... really, I think the argument that Nvidia needed to make was that it is in America's best interests to sell to the Chinese and allow them to use, to build on American infrastructure. It's the difference between sort of short term strategy and long term strategy and I do think they were correct to argue that. I'm glad that they had success.

[00:20:28] Pamela Ritchie: Speaking of long term strategy, let's just go back to the style of how you invest. Kyle, we've been through this before but it's always good to remind people, sort of types of buckets, how you go after particular stories that have growth attributes.

[00:20:45] Kyle Weaver: Just to remind our listeners, Becky and I, we generally invest on a three to seven year timeframe looking for companies that can double or triple over that period of time and that are going to be very cheap as they get to those out years which we think is what a growth company is supposed to be. It's a company that proves its cheapness over time. We can get there in different ways and we always try to have some ideas in different baskets. The core of the fund and the index that we're up against and trying to beat every day is full of strong long term growers which are the big index components from Visa and MasterCard to Nvidia and Microsoft. We try to find the best combinations of growth and value and durability in that basket.

[00:21:37] To either side of that are names that may not be in the index or they may not be large in the index yet but we hope will be one day. Some are the breakthrough growth companies, we call them, and that's everything from small-cap biotech names where we're waiting for the science to prove the business model to fast growing companies in either the tech space or consumer space that we think can be much bigger over time. Just as one example, Tesla, which is an underweight in the fund now but has, at times, been one of our larger bets, Tesla started out as a breakthrough growth company when it was an unprofitable car company that didn't have any mainstream models. Since then it's become a trillion dollar market cap stock with its whole new set of controversies around it. That's one example of the breakthrough growth bucket kind of graduating. Netflix would be another example.

[00:22:35] On the other side of the fund we have, we call them resilient growth. It's kind of code for names that a value fund manager might own but we like the growth story. Oftentimes the growth story there is underpinned at the level of free cash flow per share or earnings per share growth rather than fast top line growth. You have a number of names in the fund that fit the bill there from Flextronics to T-Mobile, these are long time holdings that are starting off at a very reasonable level of valuation and we think just get much, much cheaper as their business models compound and as they allocate capital correctly. The common theme is that we think all these names should be cheap on a multi-year basis. The key reason that we try to have some names in all these different buckets, one of the other rules we try to follow is to keep the fund positioned to take advantage of volatility.

[00:23:36] April, that Liberation Day was another instructive case lesson how important it is to do that. You don't want to have everything go up or down the same amount at the same time, or you can't really do that, so we try have a variety of ideas, even looking across sectors and across geographies and across themes that also belong to these different buckets. They have sort of different growth profiles there. Becky, I don't know what you would add to that.

[00:24:04] Becky Baker: I think that was perfect.

[00:24:05] Pamela Ritchie: It's so good to come back to that and to be reminded and, actually, hear some of the names that you put in there. I feel like this is a good moment to move to the discussion of connected TV. We are in the midst of earnings, and the earnings are coming out all over the place, there happens to be something that fits this bill coming out pretty soon, the overall discussion of connected TV. Becky, it has been going for a while, I just wonder if there's sort of new tipping points within this story.

[00:24:34] Becky Baker: I think we've been excited about companies that operate in this connected TV space for a couple of years now. As you've mentioned, it's about to be tech earnings. Netflix sort of kicks us off tonight after TSM this morning. What we're excited to see, I think, in the next couple of quarters from these companies is the progress that they can make on monetizing the enormous user bases that they have with advertising. In the case of Netflix, it's only been a couple years since they started even offering the consumer the option to sign up and instead of paying a higher monthly price they can pay a lower price and see some ads. This has been a really popular option for consumers. I think they said last quarter that 50% of their sign-ups are coming in the ad tier. People really like this. I think it also helps them, if there's a consumer who is feeling a little more squeezed in terms of their budget it prevents that consumer from turning because as they're maybe logging on to leave Netflix for a period of time they see this option to stay but watch a couple of ads and have to pay less. I think it's helped Netflix in a lot of ways and we really like to see more progress in their advertising efforts given how popular this plan has been with consumers. There are other names in this space that we're excited about. Roku's been a long time holding that announced an exciting partnership with Amazon this quarter. It may take some time to play out but I think these tie-ups make a lot of sense in a market where there's just an enormous opportunity as they focus more on advertising.

[00:26:05] Pamela Ritchie: Kyle, take some of that away. As you mentioned, Roku's been there for a long time doing some of this but these tie-ups, it seems like sports is one of the main things that is coming faster and faster to a more connected TV model. Is it fast enough or are those old long term media legacy deals just still hanging on?

[00:26:30] Kyle Weaver: I think it's coming. Again, one of the luxuries of looking at growth over a three to seven year timeframe is I think we don't spend as much time trying to pinpoint exactly where the tipping point is but we're pretty sure the tipping point is coming when we might be in it already. I think the questions when we get to invest, it's a matter of when not if kind of basis, we tend to like that. We think that we've found that with some of the connected TV names that we own in the fund and that we have owned for a while. Roku is a great example. We've owned it for a while. The stock has actually been one of the big laggards relative to others in our fund over a two and three year basis but over that period of time, and part of the reason it remains such a strong position, is they've just continued to grow their install base, continue to take shares and operating system, continue to build advertiser relationships and they've just begun to open up their platform to DSPs, that's demand supply platforms, sorry, and monetize the data that Roku has on the viewers and what they're watching, which is something that all advertisers in the DSPs that they use to advertise are very excited to pay for. We think that it's happening and that sports is one of the real accelerators to just getting people to come over and turn on the football game on their connected TV instead of trying to find it on a linear channel.

[00:28:16] Pamela Ritchie: I'll just pivot a bit to other things that would be in one of the other buckets that you mentioned there, Kyle. Becky, just putting to you, actually, the story of rates which has its own headlines going on right now, certainly, but just the idea of rate sensitive industries, ultimately, where you do or don't find kind of a cyclical story. I think you'd mentioned housing last time we spoke and rates had come down at that point, maybe just a bit of an update on some of those other industries that you're involved in and that you are finding opportunities in.

[00:28:52] Becky Baker: I think we are excited about the prospects for housing but I think similar to the way Kyle described the situation in connected TV, this is a matter of at some point we think the housing cycle is going to turn and it's going to be a tailwind to many of the stocks that we own but we're not sure exactly when. In the U.S. we've had a lot of headwinds to housing. We've had issues around affordability because of the inflation that came after COVID. We've had rates rising and now even though they've sort of stabilized it's been a headwind because so many consumers have very low mortgages on their homes. As a result of those dynamics existing home turnover is at least 25% below the long term average. We have a significant shortage of new housing in the U.S. that we think does need to be rectified over time. In the fund we own building product companies that we think will benefit from this new build dynamic coming back. We own some internet platforms that help consumers find a new home and we think when existing housing turnover improves that's going to be a positive story.

[00:30:00] Unfortunately, this has been a space that we've been hoping would turn for the past year. It has not started to turn yet. Q2 looks like it's shaping up a lot like Q1 did in terms of down slightly year-over-year for pretty much everything in the housing space. But it's kind of nice, I think, in a period where we have a lot of stocks working in AI, a lot of stocks that are exposed to tech broadly have been great contributors to the fund. I think we're actually happy that we have some spaces that feel like they're really getting no love in the market because, hopefully, that means there's some good things ahead.

[00:30:34] Pamela Ritchie: It's sort of the takeoff, the runway for some of that. Kyle, just wanted to ask you actually about health care. That does seem to be of the policy pieces that have been issued through the one big beautiful bill and so on, it's been crushing for some investors in health care. I know you're in different areas. You mentioned biotech earlier so that isn't really the same thing. Do you still like parts of health care? Can you bring us up to date on that?

[00:31:02] Kyle Weaver: Absolutely. I think the managed care space is a tough one and I don't think you'll find us expressing much conviction one way or another there. Science in the U.S. is still outstanding and there are a lot of breakthrough areas to invest in. I think in biotech in particular, I mentioned that oftentimes we'll place very small bets in companies that are years away from commercializing a drug. What I think is interesting now, as we were reviewing the fund just recently is some of the names that we've owned for a couple of years based on promising technology, they are getting close to where the commercialization is going to happen and a number of those ... now we look and we think they're only two or three years away from having a very profitable drug that will make the stock look very cheap at today's prices as it has commercial success.

[00:32:00] We also own some medical device companies that have a proven product out there that saves lives, it's easier to operate, that doctors love, and are taking share in large areas of the health care space through better technology. Health care is a very idiosyncratic space and it's a perfect example of how these stocks often will move together on a day-to-day basis even though over the long term it'll be the science, each one is a completely idiosyncratic story. I think we like a lot of the bets that we have there, although you won't find many of them in sort of our top five or top ten because we're pretty well diversified.

[00:32:55] Pamela Ritchie: It's really interesting, it goes back to what you were talking about style, sort of the three to five or even to seven year outlook that you have. Becky, I might just ask you to share some final thoughts, maybe slightly reflective on what's gone on in the markets and, ultimately, where this fund belongs for investors. We don't have a whole lot of time but if you could, just a final thought on what you want to leave with investors today.

[00:33:18] Becky Baker: Sure. I think we're optimistic about the way that we have the fund positioned and we're working really hard to find great ideas that look cheap looking out three to seven years, just the way Kyle described earlier. I think the nice thing about this period has been despite a lot of volatility created by interest rates and tariffs and dips to consumer confidence and sort of a laundry list of macro-oriented headwinds for companies, what we're hearing from the management teams, what we're seeing in the results in recent months, has been really encouraging. That may be because they had navigated this really volatile period during COVID and then in the wake of that so they're sort of ready for a lot of things that might come at them. They're ready to navigate a lot of macro choppiness. I think we're pleased with what we've been seeing and hearing and we're optimistic about where we're headed.

[00:34:10] Pamela Ritchie: It has been so exciting to hear about what you're invested in because it is so exciting what you are invested in. Kyle Weaver and Becky Baker, thank you for joining us here today.

[00:34:22] Kyle Weaver: Thank you so much.

[00:34:23] Becky Baker: Thanks Pamela.

[00:34:24] Pamela Ritchie: All the best to you both. Thank you for joining us here on Fidelity Connects. We'll let you know what's coming up over the next few days. Tomorrow, Friday, on the heels of the big banks kicking off earning seasons, they've been rolling through here, we're going to be digging into the banking and financial sectors as well as consumer health across North America. We'll get some reactions to sort of the global rates, global investment trends, stories with Lee Sotos. He is portfolio manager and senior analyst, as well as Thomas Goldthorpe, equity research analyst, digging into the banks and financials.

[00:34:54] On Monday, Director of Global Macro, Jurrien Timmer, he'll be back to dive into the latest macro themes that he has for you. He comes armed with amazing charts, graphs, everything is on his radar.

[00:35:05] On Tuesday, Chris Cooper, who is Director of Research at Fidelity Digital Assets, he'll be joining us for a timely discussion on the digital asset landscape including Bitcoin's institutional and government adoption,  recently hitting all-time highs. Tuesday's show will be available, this one that we're talking about right now, with live French audio interpretation just so you have that on the books if you'd like. Thanks for joining us. We'll see you soon. I'm Pamela Ritchie.