Artificial Intelligence (AI) may power stocks for decades.
It all started with the launch of an app in November 2022, ChatGPT – a shiny new chatbot powered by a nascent form of artificial intelligence known as generative AI. Though the technology is nothing new, the latest incantation has captured imaginations, a public narrative, and an awful lot of investor interest.
Trained on vast quantities of data, algorithms are able to generate instantaneous content – video, audio, text, and computer code – in response to prompts given to them in a naturalised, human form. What observers believe is that the rather clever data scientists and engineers of Silicon Valley have created a once-in-a-lifetime game-changing tool with the ubiquitous power to transform businesses and our lives.
It’s why investors have been snapping up technology stocks sitting squarely in the crosshairs of the AI investment theme, driving the US stock markets this year.
For those of us peering on, many are left wondering: is this really the game-changing tool investors think it is, or just overblown hype?
A printing press for our times
Drawing parallels in history to the advent of the printing press or the worldwide adoption of the internet, generative AI could transform the way we perform tasks at home, school, and at work. What’s more, by reimagining how we access and synthesise information, companies may finally be able to boost productivity in the sizeable strides they have been seeking for decades.
The technology is powerful in three fundamental ways.
First, models are trained on huge quantities of unstructured data and have a wide knowledge base, meaning they reach beyond the confines of narrow tasks to much broader applications. Second, they are instructed by the natural language we speak, doing away with the need for specialist programmers and complex code. Third, they are able to generate entirely new data in the form of content, producing text, computer code, audio segments and videos swiftly and for negligible cost.
As a result, the technology could optimise business processes in almost any industry across the planet. According to Goldman Sachs research, it could lift global labour productivity by one percentage point annually for the next decade at least. It’s why CEOs on earnings calls have been scrambling to talk-up their own ideas and uses for AI.
Opportunities ripe for the picking
The scope of potential applications for the technology is dumbfoundingly wide. Talk simmers over its use in e-commerce, education, autos, HR, healthcare, agriculture, gaming, marketing, finance, data security, and travel & transport. And yet, in its current fledgling state, picking which company wins is perhaps a treacherous path for investors.
Alliance Trust stock picker SGA makes the point: “nobody truly knows where the development of AI will ultimately lead, nor the magnitude of the costs involved to get there, [but] it is clear that the timeline for businesses utilizing new AI applications to enhance productivity has accelerated”.
The disruptors most directly involved in delivering AI technology have been the start-ups that have emerged beyond simply just ChatGPT – for example Stable Diffusion and MidJourney for images, GitHub for code, Synthesia for video. But these are risky fledgling ventures with unproven business models and unreliable cashflows. As Alliance Trust stock picker GQG puts it: “profitability from such enterprises, at least as we sit here in mid-2023, is highly uncertain”.
As such, AT stock pickers are casting their eye to incumbent firms facilitating in the delivery of technology. GQQ uses the analogy of “selling picks and shovels to 19th century gold miners rather than betting on any individual miner themselves”.
These include the more obvious beneficiaries which have been rallying strongly this year: the mega-cap providers of cloud data-centres and silicon chips that power the AI algorithms and train the models. In the Alliance Trust portfolio, these include names such as Alphabet, Meta, Amazon, Nvidia and ASML.
In addition, elsewhere in the Alliance Trust portfolio, the stock pickers have also been finding less obvious beneficiaries where AI models have the potential to streamline product and service offerings; good examples being stock picker SGA’s investments in Intuit and Salesforce.
Beware the bandwagon
Given the strong AI-driven rally in stocks this year, Alliance Trust’s stock pickers are aware of the potential for hype and exuberance beyond the value the technology may create. Black Creek, for one, believes valuations in mega-cap technology space may have reached “lofty’ heights. This points to the potential for a pullback in US markets where AI beneficiaries are seen to be concentrated.
What’s more, there are also potential investment risks. These include question marks over the security of intellectual property, potential bias and toxicity within AI models, the ability for AI to ‘hallucinate’ answers and spread disinformation, as well as the outcomes of a multitude of copyright lawsuits brought by those that own the data on which the models are being trained. As such, the stock pickers at Alliance Trust remain cautious as they watch the evolving landscape.
All told, the consensus remains amongst investors that AI could be game-changing for society and businesses, and is likely to unlock value across vast swathes of the stock market over the medium to long term. Over the short term, it has been likened to the age of alchemy prior to the development of chemistry as a scientific field. For the stock pickers at Alliance Trust, this means it’s a game of ‘let’s see which potions work first’.