Wall Street has changed significantly since the early 1990s. Not only have the markets evolved but so has the business of investing. Back then, the due diligence process was both manual and slow. Simply obtaining company financials was challenging, as investors had to request materials over the phone and then wait for a package to arrive in the mail. The next steps were even more cumbersome – spreading numbers by hand on paper and trying to identify important trends and key metrics with only a fraction of the data that is available today. Sourcing industry data was even more time consuming and often required subscriptions to esoteric periodicals and trade publications.
But by the end of the decade, the combination of personal computers, Excel, and the internet had transformed securities research, and the process has continued to evolve. Today, nearly every public company filing is instantly available. With a click or a voice command, we can retrieve data, compare businesses, and interpret what the numbers mean. Industry data is also widely available. Artificial intelligence goes a step further, helping users collect information across companies and industries, identify patterns, and frame the questions that deserve deeper analysis.
The change from mailed financial statements and handwritten reports to information delivered and analyzed almost instantly is one example of a broader truth: innovation can create extraordinary productivity gains and long-duration growth opportunities.
Of course, the path is not always linear, as the Dot Com bust reminds us. But even in that case, the outcome was ultimately positive. The original promise of the internet was not disproven, and over time digital connectivity reshaped commerce, media, communications, and the workplace, creating businesses and capabilities that were difficult to envision at the outset.
Four Engines of Growth
That history provides useful context as we consider today’s opportunities. Investors are right to ask whether AI capital spending has moved too quickly, if valuations fully reflect future growth, and how society will manage the risks created by the powerful technology. Those questions should be taken seriously.
At the same time, it is important to consider the benefits that innovations like AI can deliver. We believe we are currently in the early stages of a transformative era in technology that should be a significant catalyst for future economic growth. In our view, there are four distinct, yet complementary, technological innovations that we expect to have a lasting impact on both society and the markets: artificial intelligence, robotics, space, and quantum computing.
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Artificial Intelligence
Artificial intelligence is the most visible and commercially developed of the four themes. Its near-term promise is not simply that machines can generate text or images. The larger opportunity is for AI to become a general-purpose productivity layer across the economy, assisting with software development, customer service, research, logistics, design, manufacturing, health care delivery, and decision support, just to name a few applications. As models improve and the cost of using them declines, adoption should broaden from large technology companies to enterprises of every size.
The growth trajectory will likely be uneven: Infrastructure spending may periodically exceed demand, new competitors may pressure established software models, and regulation will evolve. Likewise, cybersecurity risks have increased, which may require a shift in industry priorities and/or a slowdown in model development.
Nevertheless, we believe the companies that pair differentiated data, domain expertise, distribution, and disciplined capital allocation with AI capabilities can deepen their competitive advantages. The central investment task is to distinguish durable productivity and revenue gains from products that are easy to replicate or where the unit economics remain unproven.
Robotics
Robotics brings intelligence into the physical world. Industrial automation is already well established, but advances in sensors, machine vision, simulation, computing, and AI are expanding the range of tasks that machines can perform. Over time, robots may become more flexible, easier to train, and economical in a wider variety of settings, including factories, warehouses, agriculture, construction, health care, and selected service applications.
The growth opportunity extends beyond robot manufacturers to the enabling ecosystem of semiconductors, motion-control systems, precision components, software, and safety technologies. Adoption is likely to be gradual because physical environments are complex, reliability standards are high, and the return on investment must be clear. Even so, persistent labor constraints and the need for greater productivity provide powerful incentives for businesses to automate. We expect some of the strongest industrial companies to be those with deep engineering expertise, large installed bases, significant service capabilities, and products that solve costly, repeatable problems for customers.
Space
The commercialization of space is moving from a government-led activity toward more private sector investment. Lower launch costs, reusable systems, and improved satellite technology are expanding the feasibility of communications, earth observation, navigation, scientific research, and national-security applications.
The most attractive investment opportunities may not be limited to launch providers. They may also emerge among suppliers of mission-critical components, communications equipment, specialized materials, industrial gases, ground infrastructure, and data services. As with prior infrastructure cycles, the growth path will include technical setbacks, capital intensity, regulatory complexity, and business models that fail to earn adequate returns.
Quantum Computing
Quantum computing is the earliest stage opportunity in this group, but its potential is significant. Rather than replacing classical computing, quantum systems are intended to address particular categories of problems that are exceptionally difficult for conventional machines. Where classical computers process information as bits that are always either 0 or 1, quantum computers use qubits that can exist in multiple states simultaneously — a property called superposition — allowing them to evaluate vast numbers of possible solutions in parallel and potentially solve certain complex problems far more quickly than any conventional system could.
Possible applications include materials discovery, chemistry, optimization, cryptography, and complex simulation. The timing and scale of commercialization remain uncertain because stable hardware, error correction, software tools, and a trained workforce must all advance. For investors, uncertainty argues for humility regarding risk versus reward. Near-term value may accrue first to the enabling layer, including advanced instrumentation, control systems, and hybrid computing tools, before broad end-market applications mature.
How Our Portfolio Companies are Participating
The four themes described above are not abstract. Many companies we own are directly participating in these growth platforms, each in ways consistent with the roles they play across their respective industries.
Artificial Intelligence
Our exposure to AI is the broadest and most diverse of the four categories, as the industry is also the most mature. We have long owned a subset of the hyperscalers, as these companies enjoy immense competitive advantages, have been some of the most profitable businesses in the world, and have significant runways for future potential growth. We remain invested in them not only because they continue to build the foundation for the AI economy (i.e., data centers), but because they have successfully monetized the technology from the beginning, so their core revenues and profit margins continue to climb. Importantly, we do not invest in all of the hyperscalers, as some of them have already amassed substantial debt burdens, and we are wary of their business prospects going forward.
In addition, we invest in semiconductor fabrication equipment as well as semiconductor manufacturers, as graphical processing units (GPUs) are the foundation of the AI ecosystem. In fact, we have increased our allocation to chipmakers recently, as they are the primary beneficiaries of the vast hyperscaler CapEx investment of the past few years. Pre-AI, hyperscalers generated copious levels of free cash flow, but now they spend all or nearly all of that operating cash flow on CapEx, and the semiconductor companies are currently awash in excess liquidity. Longer term, we believe both the hyperscalers and the semiconductor industries will be highly cash generative.
Robotics
Our primary exposure to robotics is through ecommerce. A small handful of the most advanced retailers have deployed thousands of robots across their fulfillment and delivery networks, using automation to improve throughput, reduce injury rates, and manage labor costs.
Space
Our exposure to the space industry is focused primarily on companies that provide the critical infrastructure supporting the broader commercialization of space. Rather than concentrating on launch providers or spacecraft manufacturers, we favor businesses that supply essential components, industrial gases, instrumentation, and other technologies that support launch operations, satellite systems, and aerospace applications.
We believe many of the most attractive opportunities may emerge from these enabling businesses, which often benefit from industry growth while facing less competitive and technological risk than the higher profile companies operating at the forefront of the sector.
Quantum Computing
Although quantum computing remains the least developed of these four themes, we do have exposure through pharmaceutical companies that are leveraging the technology in their research and development efforts.
Currently we feel the most attractive opportunities are in businesses that may benefit from the practical application of quantum technologies, rather than companies whose success depends solely on the development of quantum hardware. We also recognize that several hyperscalers continue to invest heavily in quantum computing, so they will be well positioned should applications for quantum computing take hold.
Opportunity, Risk, and Investment Discipline
In our view, it is difficult to imagine that these technologies will leave any major part of the economy untouched. They may influence how we shop, travel, manufacture, communicate, entertain ourselves, conduct research, and perform our jobs.
Perhaps more importantly, the four platforms are highly complementary, which could accelerate the development of each individual technology. For example, AI could potentially contribute to scientific discoveries that increase the pace of quantum computing advances. Or, like a science fiction movie, AI-enabled robots could travel to space to perform critical tasks that are too dangerous for humans.
The future will almost certainly surprise us, and the market’s path will not be a straight line. There will be periods when expectations move faster than adoption, capital is misallocated, or valuations detach from underlying cash flows. Some highly promoted businesses will disappoint, while less obvious suppliers and infrastructure providers may create substantial value. Acknowledging those risks does not require us to dismiss the opportunity. It requires us to remain disciplined about business quality, competitive advantage, balance sheet strength, reinvestment economics, and valuation.
Portfolio Positioning: Maintaining Our Focus On Quality
We will continue seeking quality growth companies that generate attractive returns on capital, possess durable competitive advantages, and have credible opportunities to reinvest for future growth. We will also insist on reasonable valuations and the ability to own a business through inevitable periods of volatility. The technologies discussed here may create the next generation of important companies, just as the internet era produced new leaders while strengthening select incumbents that adapted effectively. But it is also critical to balance the exposure to these technologies with other attractively valued, high-quality companies that are well positioned to grow over time.
Final Thoughts
Our conclusion is optimistic but measured. We may discover that portions of today’s market reflect excessive enthusiasm. But we also believe the current convergence of artificial intelligence, robotics, space, and quantum computing represents an unusually broad set of opportunities to improve productivity and address difficult problems. Our responsibility is to participate thoughtfully, with patience, humility, and discipline while embracing Osterweis Capital’s long-standing investment principles.
As always, we thank you for your continued confidence in our management.
John Osterweis, Founder, Chairman & Co-Chief Investment Officer – Core Equity
Gregory Hermanski, Co-Chief Investment Officer – Core Equity
Nael Fakhry, Co-Chief Investment Officer – Core Equity
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Mutual fund investing involves risk. Principal loss is possible.
The Osterweis Fund may invest in medium and smaller sized companies, which involve additional risks such as limited liquidity and greater volatility. The Fund may invest in foreign and emerging market securities, which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks may increase for emerging markets. The Fund may invest in debt securities that are un-rated or rated below investment grade. Lower-rated securities may present an increased possibility of default, price volatility or illiquidity compared to higher-rated securities. Investments in debt securities typically decrease in value when interest rates rise.
Investment and insurance products are not FDIC or any other government agency insured, are not bank guaranteed, and may lose value.
No part of this article may be reproduced in any form, or referred to in any other publication, without the express written permission of Osterweis Capital Management.
This commentary contains the current opinions of the authors as of the date above, which are subject to change at any time, are not guaranteed, and should not be considered investment advice. This commentary has been distributed for informational purposes only and is not a recommendation or offer of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain and expand the company’s asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value.
Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain assets such as property, plants, buildings, technology, or equipment.
Operating profit margin is calculated by dividing a company’s net income (excluding interest, taxes, and other non-operating costs) by its net sales.
Duration measures the sensitivity of a fixed income security’s price to changes in interest rates. Fixed income securities with longer durations generally have more volatile prices than those of comparable quality with shorter durations.
Osterweis Capital Management is the adviser to the Osterweis Funds, which are distributed by Quasar Distributors, LLC. [OCMI-1019419-2026-10-14]
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