The magic behind the machine

The goal of AI is to make machines smarter and more useful, thereby increasing their efficiency and output and giving those companies that use it wisely a competitive edge, better insights into customer needs, and, ultimately, increased revenues or reduced costs.

While the logic behind the investment case is rather struc­tural in nature, there are two main factors that will shape the evolution of AI:

1. The availability of abundant data

2. Increasing computing power

There is little doubt that both computing power and available data volumes will continue to grow strongly over the next decades, increasing the speed and accuracy of AI. That said, there are still some doubts about data collection, security, and privacy, which is fuelling a public debate.

Will the public debate derail the investment case for AI?

We do not think so. However, we do acknowledge that socio-polit­ical concerns, e.g. regarding changes in the labour market and the per­ceived threat of technology giants, as well as the increasing polarisation of the world order, will remain areas of intense debate.

A look at AI stocks

The share prices of companies involved in AI were not spared from the stock market rout that unfolded in 2022. In fact, many of them underperformed significantly after investors reassessed their growth potential amid higher interest rates and the normalisation of spending on infor­mation technology after the Covid-related demand surge. However, valuations are now back in line with historical averages.

While share prices corrected sharply over the past year, corporate management across the sector appeared unfazed and continued to spend. Judging by the number and value of AI start-up acquisitions, 2022 remained a year of strong interest, with (mainly) large-tech companies buying into AI technology.

According to our Technical Analysis team, the situation for AI-related stocks looks rather positive. They say that the downtrend that started in 2021, after six years of stellar performance, has now broken, and they conclude that if the segment manages to stay above the November 2022 lows in terms of share prices, the outlook remains positive.

Which three clusters of companies will benefit from AI?
 

1. AI enablers and adopters: AI enablers will train AI solu­tions themselves, embed them as part of their software, offer them as a service to end users, and potentially expand their target markets. AI adopters will be used to automate and improve the efficiency of existing processes, which should result in superior insights and contribute to operat­ing-cost reductions.

2. Cloud computing: AI software will increasingly run in the cloud, as it gives its users wider accessibility, allows for lower operating costs, and provides cutting-edge technolo­gies that would otherwise require excessive capital expend­iture.

3. Semiconductors: The growth of cloud computing and AI is creating huge demand for semiconductors, such as com­puting units, memory, and other AI-specific components. AI-specific chip sales are expected to reach USD 77 billion by 2025, up from USD11.2 billion in 2021, according to industry estimates. Higher demand will benefit chipmakers and semiconductor equipment companies.

What are the risks?

AI poses sustainability challenges in relation to its impact on the job market and on the environment. However, the reputational and regulatory risks associated with misinformation and the harmful use of AI are potentially the most material risks for AI companies. Indeed, it is important to note that AI and natural-language models are prone to making errors and generating misinformation, while they might infringe data privacy, security, and intellectual property.

We believe we are just scratching the surface of what AI is capable of and expect most industries to gradually integrate it into their processes as well as finding new applications. Adopting this technology in an efficient and safe way will be a trial-and-error process. Risks shouldn’t be underestimate but the potential benefits are immense. Going forward, we see the unfolding of an AI race where the rate of innovation and the launches of consumer-facing products will accelerate materially.