This note was not written by artificial intelligence (AI). While this seems like an obvious statement, we are heading into a future where the line between content created by machines and by humans will become increasingly blurred. While some analysts predict AI could become the most disruptive technology of our lifetime, it is fair to state we are in the early stages as it relates to end-user applications that leverage AI. We see excitement for AI as being a major contributor to the current market leadership from large-cap tech stocks, including, Microsoft, NVIDIA, Alphabet, and Meta.*
Without question, AI is coming. Some people are correctly pointing out the need for thoughtful deployment of AI due to its seeming unlimited potential to alter society. However, historically there is a first-mover advantage in new technology development. This introduces a unique set of risks that go beyond any investment thesis or portfolio, but that is beyond the scope of this report. As is usually the case for transformative change, it is difficult to find the best comparison to gain the correct context. For AI, there are characteristics that it shares with past technological advances:
- First, like the early years of cloud computing, AI requires scale and raw computing power. This means initially, it will be a tool offered and used by the world’s largest technology companies. Open-source architecture is making strides to bring AI to smaller platforms, but this still emanates from scale providers.
- Second, it shares some similarities to the dawn of the internet. It levels the playing field, giving small users a powerful tool that brings more information to where they are.
- Lastly, as Warren Buffet alluded at the Berkshire Hathaway annual meeting, it is also similar to the dawn of the atomic age where a tool with power not fully understood was released into the world.
Like the early days of the internet, we expect investor interest in AI to exceed initial practical uses for the technology. In some cases, artificial intelligence sounds like a buzzword that companies use to increase interest in their equity. There is some disconnect between the talk surrounding AI and the actual implementation. From a practical standpoint, companies are exploring utilizing AI in their businesses, but there is some healthy paranoia when it comes to introducing AI to a company’s data. Companies generally were hesitant to move data from on-premises data centers to the cloud due to fears of data being compromised. As it relates to AI, these fears appear more rational as there’s no turning back if a company’s data is introduced to the broader ecosystem. Due to the all-encompassing nature of AI, there’s nowhere for the data to hide in the event of a breach. Therefore, companies are opting for using AI in closed environments as data is the lifeblood for any company in today’s business.
In our view, the best way to be exposed to AI is through hardware infrastructure and large diversified providers. This is despite many investors preferring to find “pure plays” to better capitalize on a theme. But, in this case the benefits of diversification are crucial because the initial capital outlays are significant and there are greater inherent risks in smaller enterprises.
Success in AI is driven by a few key attributes:
- Large budgets are required. Technology is a scale business today. The infrastructure, the power consumption, and the technology hardware costs are massive, which means the biggest companies are able to provide the best technology available. The largest companies are also well diversified, which helps fund AI spending.
- Massive amounts of data drive the demand for AI. Large-cap companies have the databases that fuel artificial intelligence.
- Cutting edge technology and engineers are required to develop, build, and operate AI. The biggest tech companies are able to attract the top engineers.
One of the early battlegrounds for AI is the online search industry. It is an obvious fight, and it illustrates one of the challenges of applying AI. If AI can comb every corner of the internet to find the best answer to a query, what need is there to pay for ad placement in an online search? Steve Jobs at Apple was famous for saying the company could not hesitate to cannibalize its own business because otherwise someone else would. AI could prove to be very deflationary to the online ad market, and social media platforms are built around ad spending. This does not even begin to address the risk of the integrity of information if bad actors are able to leverage the technology.
Artificial intelligence is the future of technology. But, unlike other advances, this one comes with a different set of risks than prior changes. Once deployed, it is unknown how quickly AI will impact the world, both good and bad. There is a high probability that AI will impact the world faster than many believe, or in some cases prefer. From an investment perspective, for now, we prefer focusing on those companies building out the infrastructure upon which the battles will be fought, and the winners and losers decided.
To read the publication in its entirety, select "Download PDF," below.