AI: winners and losers in the face of disruption
Artemis’ chief investment officer Paras Anand says the winners of the artificial intelligence revolution are likely to come in different guises. Aside from obvious direct beneficiaries such as Nvidia and TSMC, companies in ‘old economy industries’ should also see substantial productivity advantages.
Political and social revolutions always bring winners and losers. Certain factions gain power; others surrender it. The same is true of technological revolutions, with the “gale of creative destruction” invariably propelling some businesses to new heights while blowing others away.
Such a story is beginning to play out in the sphere of artificial intelligence (AI). While it is by no means a new field, game-changing breakthroughs in this fast-developing space are now underlining its extraordinary disruptive potential.
OpenAI’s cutting-edge chatbot, ChatGPT, has captured many of the headlines. Nvidia’s soaring share price and super-bullish sales forecasts have also drawn plenty of attention. The cost of chips aside, perhaps most interesting is how cheaply AI could transform productivity in many industries. Its value may come to be determined more by how smartly companies deploy the technology than the scale of investment.
Meanwhile, on the negative side, there have been warnings that organisations, industries and even entire sectors could be transformed beyond recognition – if not wiped out.
It is a lot for investors to absorb, and much of the noise could yet prove more hype than substance. But the fundamental idea that some companies will prosper while others flounder – or even fall by the wayside – will inevitably hold.
Ultimately, the losers could outnumber the winners. Morgan Stanley recently published a fascinating analysis of how technological advances are adopted, suggesting downside disruption occurs sooner than – and twice as quickly as – upside diffusion.
It is also vital to note that the big winners, even if they are relatively few, are likely to come in various guises, as the following thoughts from some of my colleagues illustrate.
Artemis US Extended Alpha Fund
Nvidia
“A lot of conversations about investing thematically in AI begin and end with Nvidia, and there are good reasons for that,” says co-manager William Warren. “The company’s graphics processing units are used to train and operate large-language systems such as ChatGPT, and Microsoft’s announcement earlier this year that ChatGPT would be integrated into its search engine, Bing, sent Nvidia’s shares soaring.
“Of course, it would be easy to dismiss the excitement around Nvidia as hype. The decision to own a share that trades so far above consensus earnings estimates for the next 12 months isn’t one we take lightly. The company also relies heavily on demand for its video-game chips, and its AI focus would have to make up for any shortfall if that segment were to come under pressure from a recession. Nonetheless, we still believe the long-term opportunity is large enough to justify a holding – even at the current valuation.”
Advanced Micro Devices
“There are bound to be forecasting traps in a rapidly changing arena like this, but we can at least look for help from markets that are already well established,” says co-manager Adrian Brass. “For example, around $1.7 trillion per year is spent on software and IT services to help businesses maximise sales and reduce costs, while the pharmaceutical industry spends around $240 billion on researching new drugs and bringing them to market. It isn’t hard to imagine, say, a tenth of that combined figure being channelled into developing AI models that do a better job than the technologies available now.
“In addition, as suppliers ramp up production to meet demand, there should be announcements from competitors looking to take a slice of the market. This is why we hold Advanced Micro Devices – AMD – which we expect to announce big wins for its graphics processing units, particularly with large public cloud vendors, before the end of the year.”
TSMC, Synopsys, Lam Research and Amazon
“Several of our tech holdings have performed well on the strength of AI’s rise,” says co-manager Alex Stanić. “They include TSMC, which makes Nvidia’s semiconductors, and Synopsys and Lam Research, which supply design software and services and equipment respectively to the semiconductor industry. We also believe several others could offer excellent value if demand keeps supporting their growth.”
Speaking at a recent webinar Global Equities: What to expect in H2, Stanić offered another name. “Amazon is one of the bigger holdings in our portfolio and one we bought back earlier this year. It’s a critical enabler of AI. Through its subsidiary, AWS – Amazon Web Services – it has the highest exposure to more innovative businesses and start-ups that are powering up new AI models and large-language models. It’s a stock that hasn’t really caught fire with the excitement we’ve seen in the rest of this space.”
Union Pacific Railroad
“We shouldn’t overlook the opportunities offered by non-tech players for which AI will deliver efficiencies,” says co-manager Natasha Ebtehadj. “These wins might take longer to realise, but current valuations may be more attractive than those of the AI revolution’s poster children. Even a company like Union Pacific Railroad, another of our holdings, could be a beneficiary. It has been deploying AI-based solutions already for several years to streamline operations and improve safety.”
Ebtehadj is also concerned about the threats AI can pose. “One of the key implications of AI is that companies need to urgently rethink any business model that charges for reworking existing data,” she says. “A salutary example is Chegg, which is a US-based online education provider. Earlier this year it issued a profit warning, blaming ChatGPT for a slowdown in sign-ups for its offering. Its share price fell to less than $10 in early June, having been at nearly $30 in December.”
Investors are wearily accustomed to the noise surrounding “the next big thing”. Such claims usually turn out to be unsubstantiated, because the reality – even today – is that genuinely transformative innovations are relatively rare.
Yet it is becoming ever more apparent that AI could join a select group of technologies that qualify as radically disruptive. It looks set to reshape multiple aspects of day-to-day life, as the internet and the smartphone did previously.
This being the case, investors should pay close attention to the bigger picture. Every sector and industry is likely to be affected by this revolution, and AI is becoming an important consideration for our managers when analysing stocks.
Paras Anand is CIO of Artemis Investment Management.