Cashing in on the AI revolution
The emergence of generative artificial intelligence (AI) tool ChatGPT late last year signalled a turning point in the understanding of how powerful AI could be.
For the first time, everyone now has access to tangible evidence of the disruptive capabilities of the new technology.
In the past few weeks, a steady drumbeat of companies have been at pains to highlight their AI credentials to investors during the U.S. earnings season.
At the same time, the share price of chipmaker Nvidia surged on the back of a significant increase in the forecast number of orders of their chips, which are increasingly sought after due to their ability to handle the massive processing power required to train and run AI models.
There's no doubt the potential for huge productivity gains means that AI is here to stay.
The use case of the technology has always been well understood by business, as is its ability to improve efficiency across a range of tasks like data analysis, customer service and writing software code - a trend that is only expected to continue as the technology becomes more mainstream.
As a result, many of the companies contained in the Global Robotics and Artificial Intelligence ETF (RBTZ) stand to benefit from adoption of these technologies.
The majority of these companies are directly or indirectly involved in AI in terms of development or leveraging the technology, while a third of the holdings are considered AI 'pure play' companies, including names like Nvidia, C3.AI and Uipath.
Rapid advancements in AI will also disrupt other industries posing threats but also providing opportunities. Cybersecurity and Cloud Computing are two industries we see as potential opportunities for investors.
Maya Horowitz, head of research at leading cybersecurity software company Check Point, had her team show the potential of AI to be used in every stage of a cyberattack, from crafting convincing phishing emails to writing malware and embedding it in documents.
She believes the lowering barrier to creating cyber threats will lead to a greater number of and more sophisticated cyberattacks in turn leading to a rise in corporate cybersecurity budgets. According to Gartner, information security spending is expected to reach $187 billion in 2023 as companies invest in AI-augmented security tools to counter evolving cyberattack techniques. Names like Palo Alto, Fortinet, CrowdStrike and others contained in the Global Cybersecurity ETF (HACK) stand to benefit from this trend.
While the adoption of AI applications is being facilitated by cloud computing infrastructure like those contained in the Cloud Computing ETF (CLDD) due to the need for scalable computing power and data storage to support these applications.
However, while it's clear that AI is set to continue as a long-term megatrend, it does not come without risk for investors.
While many Australian companies have recently talked up their AI credentials, we believe investors should first think global rather than local when looking for investment exposure to AI.
Most Australian corporates operating in industries outside of IT will have to rely on using AI solutions developed by global market leaders just to keep up with their competition. And the few local IT names with a service offering directly tied to AI are actually at risk of being disrupted themselves by offshore global leaders in the innovative technology.
With all the AI excitement, investors should be mindful that the current crop of perceived AI winners have enjoyed significant year-to-date stock price gains. However, generative AI has the capacity to increase total global GDP by 7% over a 10-year period according to Goldman Sachs Research. Wealth creation of this magnitude coupled with the 'winner takes all' dynamic of disruptive technology, means such gains may well be justified.
Notwithstanding that, the reality is structural change from the adoption and maturation of new technologies like AI tends to create an environment where a small number of winners dominate and take share from second tier players. This dynamic is likely to result in outsized gains for the companies that dominate, with a high failure rate for those that don't.
We are already seeing that dynamic play out in venture capital, with Morgan Stanley analysis showing that despite the price of public market AI leaders like Nvidia and Microsoft doing well, private market valuations of AI startups have on average fallen since ChatGPT was released.
However, the value of market leadership in AI is a little more nuanced. Given the rapid pace of innovation, leadership can turn on a dime, investors only need to look at the disappointing launch of Google's Bard. As a result, investors should to consider a broad basket of AI leaders rather than making concentrated stock bets on specific companies.
Overall, AI represents a compelling opportunity for investors to add growth to their portfolio. However, investors should take a balanced look at both the broader opportunities, while mitigating some of the risks associated with the emerging technology.
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