The company’s CIO speaks to InvestmentNews about investing in fast-growing technology.
The artificial intelligence boom is sweeping the market, but investors need to distinguish between hype and lasting value.
Todd Ahlsten, chief investment officer at Parnassus Investments, spoke with InvestmentNews about investing in AI and said his approach is to remain disciplined, broadly diversified, and focus on companies that can grow returns through market cycles.
“The investment landscape for AI is rapidly expanding,” says Aalsten. “Supporting infrastructure requires large amounts of compute, and as use cases for how AI models can process new data to make predictions and decisions proliferate, infrastructure needs for inference are also emerging.”
He believes the opportunity extends beyond Nvidia and Microsoft.
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“This will require more specialized and efficient hardware, extending computing requirements beyond the high-end GPUs offered by Nvidia, and custom silicon chips and memory will be a big part of that opportunity,” he explains. “We support companies like Broadcom (AVGO), Advanced Micro Devices (AMD) and Micron (MU).”
While infrastructure grabs the headlines, Ahlsten believes investors are overlooking an important part of the value chain.
“Big software companies have been ignored as the market questions whether AI can be monetized,” he says. “They have a great business model, but their growth rate has slowed as their addressable market has matured.”
He points to enterprise platforms that have the potential to reignite growth through the integration of AI.
“Software companies like Salesforce (CRM), Microsoft (MSFT), and Workday (WDAY) are in an advantageous position because they are used as central systems of record by enterprise customers,” he points out. “AI agents can be layered on top to perform tasks more productively without incurring switching costs that can disrupt customers’ daily operations.”
These are high-quality businesses with consistent subscription revenue and perpetual revenue growth, and Ahlsten says, “These companies don’t expect to be easily disrupted because they are deeply ingrained in customer operations where protecting data and cybersecurity is critical.”
Long-term discipline amidst AI enthusiasm
Aalsten’s message to investors is to be patient, and this is based on extensive experience.
“I have managed core equity strategies through seven presidential administrations and numerous market cycles,” he says. “These are unprecedented times and we have learned that it is important to take a long-term view and avoid knee-jerk reactions.”
Aalsten is looking for companies that can apply AI to enhance existing advantages, such as enhancing agricultural experiences, life sciences, and non-bank finance.
“We’re looking for great American companies with durable cash flows and businesses that we think can grow in value,” he says.
Despite AI’s potential, Ahlsten warns that “the story is reaching its climax.” He said that building AI data centers too quickly “could run into a lack of power, funding, or lack of monetization.”
“At the same time, maintaining AI build-up relative to high expectations will require unprecedented revenue growth for companies like OpenAI,” he added. “This reduces the margin for error for investors.”
That’s why his team maintains a “balanced positioning between offensive and defensive possession.” He monitors inflation, energy demand, tariffs and geopolitical risks, all of which can increase volatility or cause a market rebound.
Lessons from past technology cycles
Ahlsten sees echoes of earlier market bubbles, but he also points out important differences.
“The dot-com bubble was built by stocks on borrowed money, borrowed time, lack of cash flow, and massive investor FOMO,” he says. “Today’s AI investment boom is being driven by a small number of companies with high profit margins and significant free cash flow from existing operations.”
Still, he cautioned, “free cash flow for the largest hyperscalers is starting to shrink due to the rapid increase in data center spending.” “Some companies are starting to issue bonds and use more innovative methods to finance these large-scale projects,” he said.
“While this excitement feels similar to the dot-com boom, the position these companies are in is markedly different,” Ahlsten said. “Twenty years ago, it was software applications that ran on the Internet’s infrastructure that were profitable in the long run. This is another reason why we like software companies like Microsoft, Salesforce, and Workday.”
In contrast, “companies that are weak in terms of highly competitive markets, high debt, high economic sensitivity and high valuations do not have the quality standards that we look for,” he added. “The AI wave has a lot of hype and animal spirits in it. We aim to separate the signal from the noise.”
Ahlsten acknowledges the risk of market domination by the Magnificent Seven.
“Their valuations continue to rise and dominate market index returns,” he says. “Overconcentration increases vulnerability to fluctuations in compute power, valuation compression, or slower-than-expected monetization curves. Balancing opportunities across the technology stack is critical.”
Diversification is the best safety net, he added.
“We aim to provide balanced exposure in our portfolio, capturing the market upside and maintaining defensive positions that help protect the downside. Valuation-conscious hyperscalers and semiconductor exposure capture upside against the wave of AI adoption. However, we also have a strong focus on undervalued sectors such as life sciences, precision agriculture, and business services.”
