Identifying Investment Opportunities in AI

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Robertson Velez, CFA

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Robertson Velez, Portfolio Manager, CIBC Asset Management.

Why has AI become a hot topic? Artificial intelligence is not a new field. It’s actually been with us over the past several decades in various forms. What has changed most recently is that advances in the underlying technology have progressed to the point where AI can now do very useful things. So most recently, the current hot topic is in generative AI, which is a method of predicting components of text or graphics to generate content such as essays, code, images, or videos. This will have a significant impact on productivity because of its ability to transform the way we do most knowledge work today, and in the way that businesses can use its data to better interact with and serve its customers.

So how is AI currently being used and how do I see it expanding the use cases in the future?

So let me start by saying that we’ve made significant strides in AI over the past several years, and AI has been successfully applied in applications such as image and voice recognition, recommendation systems, and chat bots. With generative AI, I see three specific areas where we will see expanded use cases in the near term. First is productivity tools where applications such as word processors and spreadsheets will build in generative AI support to help create content more easily or in some cases automatically, and this extends to most other productivity tools such as in graphics creation or even coding, resulting in a significant change in how we create content.

Second, generative AI has a potential to revolutionize search where consumers can pose more complicated questions and receive more comprehensive answers to those questions. This has the potential to revolutionize online advertising and how consumers and businesses interact online. Finally, generative AI allows businesses to unlock and make use of the troves of data it collects about its customers or its business in a way that is useful. This has the potential to radically change the way that business uses its data to interact with and serve its customers. So those are the areas where I think generative AI has specific use cases today, and I think that over time it In the long-term, AI will revo

Other lessons we can draw from previous revolutionary technology-led booms. What I think many people miss is that, you know, technology has been driving productivity for the past several decades. Gordon Moore, one of the founders of Intel, made the observation in 1965 that computational power grows exponentially and the same cost of computational power drops by roughly half every two years, which we refer to as Moore’s Law, and it’s held true over the last six decades. Technological shifts such as internet and AI happen because the underlying technologies have progressed to the point where they become possible and practical, and I would argue in some cases inevitable. So in previous technology revolutions, investors have often fallen into the trap of overestimating the short-term and underestimating the long-term. In the case of the internet, for example, investors were overly exuberant about the promise of the technology which led to a sharp correction.

But over the next two decades, the realized potential of the internet has exceeded the early hype. So I think the same will hold true with AI, that I think investors underestimate the long-term, but they may overestimate the near term, and that’s where we have the opportunity for gains as long-term investors.

For long-term investors, I think it’s important to have a clear view of the potential of new technologies, both in the short and long-term. So in the short-term, there will be a lot of noise. Companies try to take their piece of the AI pie and leadership positions are being established. There will be periods of euphoria and depression as investors try to figure out the right expectations for this technology. In the long-term, AI will revolutionize the way that we live and work similar to how many other technologies such as the internet and the smartphone have done. The growth will be exponential and will likely exceed what we anticipate today. Long-term investors that have the patience to sift through the evolution of this technology and position their portfolios accordingly will be rewarded with above average returns.

How would I suggest that investors benefit from this boom? I think that we are still at early stages in the development of generative AI, but there will be a lot of noise in the near term as practically every company claims to be incorporating generative AI in its products and services, so it’s important to understand the value chain to determine which companies really benefit from generative AI and why. It’s also important to be very selective in the process as performance is determined as much by what we don’t own as much as what we do own. So in the global technology fund, this is what we do. We follow a disciplined process to find these opportunities in a concentrated portfolio of stocks to generate alpha over the long-term, while managing risks in the short-term.

Let me give an example of how generative AI can be used and be applicable in the industry today. The most visible example I think is Microsoft, which is integrating ChatGPT into its stack of productivity suite of products such as Office. And it can significantly expand its platform by selling AI productivity tools to a massive user base. Generative AI also has the potential to revolutionize search where Microsoft is trying to gain share with Bing and consumers compose more complicated queries and receive more comprehensive answers. And I think Microsoft has that potential to change the way that users interact with search and advertisers interact with users through search to do better targeting and thereby increase the monetization on search.

And then finally, generative AI allows businesses to unlock and make use of the data that it has about its customers, which is often stored in data centres from Microsoft through its Azure service. So Microsoft can help its enterprise clients make use of AI, make use of the cloud, and make use of its data centres, and make use of all of that data to radically change the way that businesses provide services to their customers, whether it be through improvement in the workflow, or it be through improvements in the effectiveness of advertising, or in its recommendations, or just general improvement in the level of service that these companies can provide with the help of Microsoft to use that data in a useful way through AI.

An example of a company that is critical in the value chain is Nvidia, which currently has a near monopoly in the infrastructure for AI. Based on expectation for the adoption of generative AI, there is significant room for exponential growth in the data centre equipment required for training and inference in AI, which represents a huge opportunity for Nvidia.

Another company that I think benefits from AI is Google, which I think is likely to be the best positioned to capture most of the opportunity in search. Google has 93% of the search market today and has invested heavily over the past several years in AI. With generative AI, which it’s announced recently, is likely to be able to improve monetization of that massive search user base and benefit from that over the long-term.