Insights
By: Gerrit Smit
How to invest for AI – Gerrit Smit
Investors agree: a new phase in the Fourth Industrial Revolution has arrived
Though Artificial Intelligence (AI) has been described by Bill Gates as the “most important advance in technology since the graphical user interface”, there are also many reservations. In May 2023, nearly 400 people, including some of the biggest names in AI, signed a short statement posted to the website of the Center for AI Safety, a San Francisco-based non-profit organisation, warning that their technology may pose the “risk of extinction” for the human race.
Although a somewhat contentious topic, there is one thing about AI that most investors agree on: a new phase in the Fourth Industrial Revolution has arrived.
The world quickly woke up to the realisation that AI is on the cusp of becoming part of our everyday lives when Microsoft announced its $10bn investment in OpenAI in February 2023 and presented its ChatGPT as an embedded feature within Bing.
Since then, investors have been scrambling to understand the technology behind ChatGPT and generative AI, its potential uses, how it will be monetised and who the winners and losers might be.
Companies around the world have suddenly become vocal about their own AI. Uncertainty is at elevated levels as AI may well cause material, innovation-led disruption to multiple industries and established practices. It will also require material investment of time, money, computing power and cloud capacity.
At this early stage, investors seem to have already formed certain concrete perceptions around AI:
- That Microsoft and Alphabet appear to have developed the most advanced generative AI capabilities.
- That the potential uses of AI may be widely spread, affecting many aspects of our daily lives, and that much more innovation and investment will be necessary around regulation, control and cyber security around the technology.
- That the three largest cloud infrastructure providers (Amazon/AWS, Microsoft/Azure and Alphabet/Google), through their current computing leadership, are also in the best position to make the material, further investments necessary for computing capacity.
These developments open up numerous new business opportunities for many quality operators.
Generative AI will lead to an increase in demand for the most advanced computer chips. Companies producing semi-conductor equipment already have a long and robust pipeline of orders. ASML (currently the only maker of essential lithography equipment needed to manufacture advanced chips) and Cadence Design Systems (one of two leading developers of advanced chip design software) are both well positioned to benefit from this strong demand over the coming decade.
Many of these semiconductors will end up in graphics processing units (GPUs) and tensor processing units (TPUs), which are widely used in data centre infrastructure that provides the computing power supporting generative AI. The world’s leading maker of GPUs is NVIDIA. Rivals AMD and Intel are also set to benefit both from these developments and the Biden administration’s subsidies in the sector.
As AI will later also be delivered to consumers through hardware products, companies like Apple, Meta, Samsung and Alphabet may experience demand for many new types of products.
Most enterprises around the world lack sufficient in-house expertise to design, implement and maintain these new AI requirements and developments. They rely on expert consultants, such as Accenture, to guide them through all stages. Accenture has just announced an investment programme of $3bn to address these future needs.
We are at an interesting juncture of potentially thousands of layoffs in the technology sector and excellent expertise now available to utilise new opportunities on the AI front. We are surely going to see many entrepreneurs offering new services in this context. Nevertheless, many current leaders in the Fourth Industrial Revolution are well positioned to remain leaders in this next phase of major new technological advancements. With in-depth research, investors have good opportunities to invest for sustainable and profitable strong organic growth.
Gerrit Smit is Head of Global Equity Management at Stonehage Fleming Investment Management. He established the Global Best Ideas Equity Management division in 2009 and is Portfolio Manager of their Global Best Ideas Equity Fund.
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