Where to find the tenets that make tech stocks tantalising

WHAT has made Nvidia one of the hottest tech stocks this year? If you answered artificial intelligence, you would be right. But here is a more fundamental reason: scale.

In traditional brick-and-mortar industries, increasing output requires a relatively linear increase in inputs such as capital, labour and land.

Tech companies, however, operate on different physics. Thanks to operating leverage and intellectual property moats, the likes of Nvidia can scale their output exponentially even as their marginal costs trend towards zero.

This is the engine driving the valuations of US technology giants.

Investors buying into Nvidia are not just buying into the promise that ChatGPT and Claude will reshape jobs and create massive demand for computing power; they are also buying into the compounding power of chip know-how and global network effects.

Where does that leave our local stock market? Can such dynamics only be harvested abroad? Or can the core tenets that make tech investing lucrative be found anywhere – Singapore included?

And the best supporting actor goes to…

Pure digital scalability, where a company distributes software globally at near-zero marginal cost, is admittedly rare on the local exchange.

Singapore’s technology strength lies in advanced physical manufacturing and engineering. Many of our local companies play critical supporting roles in the AI supply chain – roles that the stock market is learning to value.

Locally listed AEM Holdings , for instance, has provided chip testing and packaging for years, but it has attracted intense investor attention over the past year. In the year to Sep 18, the stock rose 447 per cent.

Another stalwart of the Singapore market, semiconductor equipment manufacturer UMS Integration , gained 137 per cent over the same period.

Both companies operate factories, require raw materials and employ skilled labour. This means that every additional unit they produce carries real physical costs. In other words, they are not the stars of the scalable AI show.

These companies instead play supporting roles. As advanced manufacturers, they possess operating leverage: proprietary capabilities, heavy upfront capital expenditure and fixed overheads.

As global demand for AI hardware accelerates, these supporting actors are running at peak capacity. Once their high fixed costs are amortised, additional high-margin orders end up supercharging profitability.

But why invest in these supporting players when global pioneers such as Nvidia exist? The answer lies in structural bottlenecks and market rotation.

To build a resilient portfolio, investors do not need to choose between local enablers and global giants. In many investing narratives, supporting actors end up with juicy roles as investors hunt for laggards with catch-up potential.

When market pioneers start to look expensive, investors tend to tactically rotate capital upstream into supply chain gatekeepers that are attractively priced. This rotation explains why the returns of both AEM and UMS have surpassed those of Nvidia this year.

While many of the foreign-listed players have been the undisputed pioneers of the AI revolution, the operating leverage of key upstream suppliers listed in Singapore has delivered explosive capital appreciation.

A framework for growth

This same story can be found in other parts of the Singapore market.

One example is Addvalue Tech , which is fitting its proprietary Inter-Satellite Data Relay System (IDRS) terminals onto low-Earth orbit satellites.

These terminals are enabling 24/7 on-demand space-to-ground connectivity, solving a longstanding communications bottleneck for the space industry.

In August, Addvalue and American satellite company Viasat said they would join forces to deliver IDRS terminals to US government fleets – a significant achievement for a small company operating in a country without a deep aerospace ecosystem.

Once Addvalue’s R&D costs are capitalised, the marginal cost of deployment is relatively low. As the space race gets global investor attention, the counter is winning recognition.

Tech investing is not about geographical selection but about business model differentiation. The path to high-growth tech exposure does not require looking across the Pacific; it requires identifying how businesses exploit scale and leverage.

There are risks to investing in the supporting players, of course. Smaller companies typically face higher structural risks and greater balance sheet constraints. They tend to also have a concentrated customer base and a lower liquidity profile.

By understanding the distinct financial physics of technology-driven business models – and accepting their corresponding risks – investors can build a highly resilient growth portfolio in their own backyards.

The writer is a remisier with Phillip Securities