The transformative potential of AI: Investor considerations

June 09, 2023

After generating the worst one-year returns since the dot-com bubble’s collapse, the domestic technology sector continues to rebound in 2023, reclaiming a leadership position among large-cap stocks and helping to restore calm after the recent regional bank-fueled volatility spike. 

Several factors have contributed to the market’s renewed appetite for risk and this impressive year-to-date performance, including the Federal Reserve’s less hawkish stance and a renewed focus on efficiency and productivity that pushed many tech firms to aggressively cut costs.

However, we believe that one factor in particular is the ultimate driver of this turnaround and will likely have resounding and transformative market impacts for years to come.

That factor? The recent and rapid rise of next-generation artificial intelligence (AI).

A disruptive force

The advancement of artificial intelligence as a dominant market theme is primarily attributable to ChatGPT, a natural language processing chatbot developed by OpenAI and released in November 2022. In contrast to legacy AI systems that can simply recognize patterns and make predictions, next-generation AI, like ChatGPT, can use past experiences to create new content in a variety of formats, including images, text, audio, and more. 

While many market pundits have likened AI capabilities to the advent of smartphones or even the Internet, we view AI as a rapidly evolving field of machine learning with the potential to disrupt and advance existing industries while at the same time creating new opportunities and businesses. 

Bottom line: This rapid adoption of generative AI functionality, spurred by the extraordinary usability and utility of applications like ChatGPT, is likely to cause a meaningful disruption to numerous industries by automating tasks previously performed by humans, generating new content and data, and improving decision-making processes.

Near-term and long-term market opportunities 

In the near term, we expect the positive impacts of the proliferation of generative AI to be most evident in the software industry, where the technology will likely play an instrumental role in:

• The development of more effective, reliable, and personalized software solutions
• Reducing the time and cost involved in product development, driving increased revenue growth and boosting overall profitability

In the long term, AI-driven software solutions are likely to drive meaningful improvement for:

• Manufacturing and industrial firms (via supply chain management, inventory control, and quality assurance)
• Financial firms (via fraud detection and market analysis)
• Healthcare (via improved diagnostics and therapy development)

Bottom line: Estimates regarding the potential size of the generative AI market vary widely; however, most forecasts anticipate a 20%-30% compound annual growth rate for the technology over the next decade. 

Other investor considerations 

The infrastructure investment required to develop and run generative AI applications may also provide a strong tailwind for select technology hardware and semiconductor industry firms:

• Advanced microprocessors and the tools used to manufacture advanced chips are the building blocks of AI applications. As a result, as AI adoption grows, so too could the demand for components necessary to run these AI applications.
• Multiple high-end graphics processors (termed GPUs) are used to power AI applications by simultaneously allowing for the parallel processing of large amounts of data while reducing the time required for training. This can be particularly useful in applications such as image and speech recognition, where large datasets and complex models are often used.

Bottom line: As AI adoption grows, the demand for multiple GPUs and other hardware components necessary to power these applications is likely to increase.