Teal Linde, manager, Linde Equity Fund
FOCUS: North American mid and large cap stocks
Top Picks: UiPath, Adobe, Pembina
MARKET OUTLOOK:
AI has been a major driver of the U.S. market and the sudden emergence of DeepSeek has put some cracks in the bullish thesis. A number of analysts have been quick to cite Jevons’ Paradox as a reason why the incumbent tech giants driving up the market will not only be fine, but actually benefit further from what’s been going on. Jevons’ paradox is named after the English economist, William Jevons, who noted in the 1860s that as coal powered steam engines became more efficient, the demand for coal didn’t decrease. It increased.
So, AI bulls are drawing parallels to Jevons’ paradox suggesting the much-reduced AI cost structure introduced by DeepSeek is going to spur even greater demand for AI, therefore rewarding the tech giants and their hundreds of billions of dollars in investments.
However, there is a slight problem with this logic. Jevons’ paradox applied to an undifferentiated input such as coal. The inputs for AI are very differentiated which allows for a lot of substitution – substitution of different types of semiconductors, hardware and software. Nvidia sells increasingly powerful and expensive GPUs. However, DeepSeek was able to use older and cheaper computer chips to basically get the same job done by coding very clever software. Hundreds of billions of dollars are being spent on data centers to support AI demand.
However, DeepSeek’s has also demonstrated that by using very clever software, it can enable highly capable distilled versions of large language models to run on consumer hardware such as an iPhone. DeepSeek is also open source which is freely accessible to everyone.
So yes, cheaper AI processing will spur increased demand. However, it’s not necessarily the incumbent tech giants who will be the biggest winners. Instead, the real stars of tomorrow will likely be smaller organizations or even startups that can now leverage more affordable AI to create products and services we haven’t even imagined yet.
- Market-moving news, fast: Get the BNN Bloomberg App now
- Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
TOP PICKS:
UiPATH (PATH NASD)
UiPath is being recommended as more of a thematic play on the emergence of agentic AI, which follows in the footsteps of generative AI. Generative AI acts mostly as a creative assistant that responds to prompts from humans while agentic AI functions as an autonomous problem-solver and decision-maker with minimal human intervention. Agentic AI is good news for UiPath which is the industry leader in providing robotic process automation software, which automates repetitive digital tasks normally performed by people. But the problem with robotic process automation is that it relies heavily on a structured environment. It can’t handle exceptions to the rule well. So that’s where agentic AI can step in and respond to unique or special situations and learn how to adapt and solve the problem just like humans do. So agentic AI bodes well for expanding the use cases of UiPath’s automation offerings. Analysts have mostly a hold on the stock because they are waiting to see more traction. But if you wait for that to happen, you will probably end up having to pay a higher price. UiPath also has net cash of over $1.5 billion representing over 20 per cent of the company’s value.
ADOBE (ADBE NASD)
In December, Adobe reported better than expected fourth quarter revenues and earnings. But management reduced their first quarter and 2025 earnings guidance by less than two per cent each and its stock fell over 20 per cent afterwards. The sell off seems a bit overdone. Investors are worried about Adobe’s ability to monetize its AI features. However, the company is pursuing a strategy which should show more progress this year. Segmentation of the user base is a key initiative to enable more optimal pricing, which would get those who are willing to pay to pay more, and by offering a more affordable “on ramp” for more price sensitive low-end customers. Management also noted progress in the rollout of Express, which is their new product to compete against Canva. The company is also betting on the enterprise segment as a key growth driver and largest near-term opportunity through its rollout of GenStudio. GenStudio is its long-promised solution that ties together the end-to-end workflow of idea creation, production, delivery and activation from a marketing standpoint. It’s basically an AI factory for advertisers. Finally, as a vote of confidence, the CEO of Ely Lilly recently made a $1 million stock purchase. But it wasn’t Ely Lily stock that he bought, he bought US$1 million of Adobe at $444 just two weeks ago. He’s a board member of Adobe and this purchase was in excess of his minimum share ownership requirement.
PEMBINA PIPELINE (PPL TSX)
Pembina is the third largest energy infrastructure company in Canada after Enbridge and TC Energy. It owns the largest infrastructure network in the natural gas rich Montney region. Its dominance in this active area gives Pembina meaningful exposure to increasing natural gas development in western Canada arising from expanding LNG projects on the BC coast. The company has an attractive current and potential suite of infrastructure projects to support growth into the late 2020s including its floating Cedar LNG 50/50 joint venture in Kitimat, which the BC government has just put on its initial list of resource projects to fast track to completion amid US tariff threats. Between the company’s excess cashflow after paying out dividends and its less leveraged balance sheet than both Enbridge and TC Energy, the company has significant capacity to self-fund major projects over the next few years without having to issue shares. Pembina’s stock has recently pulled back providing a decent entry point while offering a 5.3 per cent dividend yield.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| PATH | Y | Y | Y |
| ADBE | Y | Y | Y |
| PPL | Y | Y | Y |
PAST PICKS: February 13, 2024
BLUE OWL CAPITAL (OWL NYSE)
- Then: US$17.36
- Now: US$23.41
- Return: 35%
- Total Return: 39%
FIVE BELOW (FIVE NASD)
- Then: US$184.13
- Now: US$90.64
- Return: -51%
- Total Return: -51%
TD BANK (TD TSX)
- Then: $78.60
- Now: $85.78
- Return: 9%
- Total Return: 14%
Total Return Average: 0.6%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| OWL | Y | Y | Y |
| FIVE | Y | Y | Y |
| TD | Y | Y | Y |
