Technology stocks have been buffeted by market volatility in early 2025, with shares tied to artificial intelligence (AI) hit especially hard. Enthusiasm for AI-driven technology companies began unraveling with DeepSeek’s breakthrough in January and has continued with tariff-fueled uncertainty.
We believe this turbulence will eventually ease, and some of the more ephemeral drivers of today’s unstable markets will reset. In the meantime, tech’s big shake-up could present a compelling opportunity for long-term investors—if they know where to look.
The Changing Nature of Pricing Power
So, what has driven the technology revolutions of the 21st century so far? Decades of globalized trade policy resulted in lower input prices for consumer goods—from apparel and footwear to furniture and electronics. In turn, digital native giants were able to provide networks for shopping, payment and advertising based on capital-light business models. That’s because their competitive moats were secured by network effects (value that increases the more people use a product or service) that were digital, rather than physical.
But the world is changing. Shifting geopolitics and rapid technological innovation are driving companies to invest more, whether to reconfigure supply chains or build next-generation AI data centers. In short, we now live in a world of increasing capital intensity. This poses new questions for investors¬ to consider, including who the future tech leaders will be and which companies will earn robust returns on invested capital (ROI), our preferred measure of profitability.
Ultimately, we think it boils down to pricing power. In our view, firms with pricing power will be the clear winners in a world of increasing capital intensity.
We believe companies with pricing power have three key hallmarks:
