Small costs, big profits: Why investors should stop doubting their Big Tech investments.

John Tinsman, portfolio manager of the AOT Growth and Innovation ETF, advocates for investing in "low marginal cost" tech companies, asserting they are long-term winners due to their ability to generate high profitability and rapid growth without significant debt. His strategy, which has yielded a 32% annualized return over three years, focuses on firms like Microsoft and Visa that achieve near 100% profit margins on incremental sales. Tinsman dismisses AI bubble concerns by highlighting the robust 20%+ GAAP EPS growth of large tech companies, advising investors to maintain focus on proven large-cap growth names given the high demand for their innovative solutions.

Analysis

AOT Growth and Innovation ETF portfolio manager John Tinsman presents a compelling investment thesis centered on companies with low marginal costs, arguing this is a key determinant of long-term success. This strategy, which has delivered a 32% three-year annualized return for his fund, prioritizes firms like Microsoft (MSFT) and Visa (V) that can scale with near-100% profit margins on incremental sales, enabling rapid, debt-free growth and superior innovation cycles. Tinsman directly counters concerns of an AI-driven tech bubble by highlighting strong underlying fundamentals, specifically citing that large tech companies are posting GAAP earnings per share growth of 20% or more annually. He contrasts this with low-growth companies such as Procter & Gamble (PG), which he notes have a higher P/E ratio despite zero GAAP EPS growth, suggesting the market will continue to pay a premium for demonstrable expansion. The analysis frames asset-heavy businesses like Boeing (BA) as fundamentally disadvantaged due to their high capital requirements for innovation and production. Tinsman's view is that the current high concentration in large-cap tech is justified by immense global demand for hardware and automation, and he advises steering clear of small-cap tech due to what he terms "outrageous" stock-based compensation for executives.

Key Decisions for Investors

• Investors should consider overweighting positions in companies with low marginal cost business models, as their ability to generate high incremental profit margins supports superior, debt-free growth and innovation potential.
• When evaluating tech valuations, look beyond simple P/E ratios and weigh them against fundamental growth; the reported 20%+ annualized GAAP EPS growth in large-cap tech may justify current multiples, especially relative to slower-growing sectors.
• It may be prudent to favor established, profitable large-cap growth stocks over small-cap tech, given the manager's warning about excessive stock-based compensation and the historical risks associated with unprofitable companies.
• Monitor the earnings reports of key low-marginal-cost holdings like MSFT, V, and NVDA to validate that their EPS growth and profit margin expansion continue to support the core investment thesis.