Over the last few months, conversations around artificial intelligence (AI) have dominated in both social settings and around boardroom tables. From how AI is going to take over the world to how it can be used to optimize business processes and increase efficiencies, there has been a lot of technological jargon exchanged.
At the World Economic Forum earlier in 2023, Satya Nadella (Microsoft CEO) said that AI would become mainstream in months, not years. This has certainly proven to be the case so far.
The most recent AI trend was spurred on following the announcement and release of ChatGPT towards the end of 2022.
ChatGPT (Generative Pre-trained Transformer) is an advanced AI chatbot that can understand and create human-like interactions. Its algorithm is based on a neural network – a computer program that mimics the way the human brain works. The algorithm was initially trained using a significant amount of data from the internet, including books, Wikipedia, news articles, and various pieces of writing, which totaled more than 300 billion words.
The model is continuously learning, so it should generate increasingly more realistic output in future. With generative AI, computers can now theoretically exhibit creativity. They are capable of producing original content in response to queries and questions, drawing solutions from data it has ingested and from previous interactions with users. For example, AI models can now develop blogs, sketch artwork and designs, and write computer code. Chatbots previously worked with simple, pre-determined answers based on the wording in questions.
In the first five days of ChatGPT’s release, more than a million users logged into the platform to experience the chatbot firsthand. Its servers could barely support the demand, with the number of active users limited until server capacity was freed up. The use cases of ChatGPT have been polarizing to say the least. Mira Murati (the CTO of OpenAI) highlighted how transformative a system like ChatGPT could be in a classroom. Lecturers and teachers, on the other hand, retain a negative view of it. For example, New York City Public Schools, the largest school district in the US, banned ChatGPT in January to prevent cheating in the classroom. Murati, however, sees more advanced versions of ChatGPT allowing for a more personalized approach to education, where students can ask questions and receive answers tailored to their learning styles.
More than 10 years ago, McKinsey published a study where they sorted economic activity into three buckets – production, transactions, and interactions – and examined the extent to which technology impacted each. During the Industrial Revolution, machines and factory technologies transformed production by augmenting and automating human labour. Since then, AI has further ramped up factory efficiencies.
Transactions have also undergone several changes, including digitization, frequency, and automation. Interaction labour, such as customer service, has experienced the least mature interventions.
Generative AI is set to impact interaction labour in a way that resembles human behaviour closely. However, these tools are still intended to work with human input and intervention. It is expected that they will operate most powerfully in combination with humans, augmenting our capabilities and enabling us to get work done more efficiently and more effectively.
The most pertinent questions that we face now, are how we position our portfolios to benefit from the trend and who will benefit disproportionately so.
We believe that investment opportunity can be split between the AI developers and the AI enablers. AI developers are companies that develop various forms of AI, such as natural language processing, generative AI, pattern recognition, or predictive analytics. AI enablers produce various forms of technology, such as cloud services or AI-oriented chips that enable the development of AI. Some companies can fulfil both roles.
At Odyssey, we have highlighted five of the major contributors to AI technology that we believe stand to benefit from its growing contribution going forward.
Nvidia is the global leader in AI due to its product portfolio of graphics processing units (GPUs). The invention of the GPU in 1999 was a turning point for the computing industry. GPUs are critical for AI to achieve parallel processing capabilities. ChatGPT currently runs on Nvidia’s older series of chips (the A100 chip). According to reports by Finance Monthly, Nvidia’s newer chips could perform AI learning functions 9-times faster than the A100 chip and produce output 30-times quicker.
While it is well-positioned to benefit from the trend, a large portion of its revenue is still derived from the personal electronics market (high-end computers and cryptocurrency mining rigs), which is in the doldrums.
ASML’s products are critical in semiconductor production and are heavily relied upon in the production of Nvidia’s GPUs. It has a monopoly on the key technology used in manufacturing advanced semiconductors. As semiconductor companies began producing chips with new and advanced specifications, there was need for ASML’s machinery that can manufacture at the atomic level.
With the rapid progression and development of AI, it will constantly require more advanced chips. ASML’s technology underpins these advancements and has supported its significant revenue growth and resulted in a two-year order backlog.
Taiwan Semiconductors (TSMC) is the world’s first dedicated semiconductor foundry and is also crucial in the production of Nvidia’s GPUs. In the fourth quarter of 2022, TSMC manufactured more than 56% of the world’s semiconductors.
Micron Technology is a manufacturer of data storage components. It stands to benefit from the uptake of AI solutions due to vast quantity of memory and storage that is required. Despite having an attractive underpin over the medium-to-long term, the business is still overly reliant on PC sales, smartphones, and consumer electronics – all which have fallen dramatically over the last few quarters.
Microsoft is directly exposed to ChatGPT. In 2019, the group invested $1 billion in OpenAI (the founder of ChatGPT). In January this year, Microsoft announced an additional $10 billion investment in OpenAI. Microsoft has since released the OpenAI service on its Azure platform, which allows developers to incorporate it into their own projects.
These advancements allow Microsoft to function as both an AI developer and an AI enabler.
What this illustrates, is that there are investable opportunities in the AI space through high-quality companies. Investors are not forced to chase speculative investments in start-up companies with an attractive idea but no track-record of success. Other companies, such as Alphabet and Alibaba, have developed their own AI chatbots in a bid to compete directly with ChatGPT. However, they are far behind Microsoft and ChatGPT, and recent demonstrations of Bard (Google’s chatbot) have not been as exciting or as useful as what we have experienced from ChatGPT.
The companies that we have highlighted are definitely poised to benefit from the significant growth in AI overtime. However, each company will benefit at different stages in the AI development cycle, and we will continue to follow the progression of artificial intelligence closely. To illustrate the capabilities of ChatGPT and its thought patterns, we prompted it to “Briefly describe your primary role in the development of humankind going forward.”
This was its response:
“As an artificial intelligence language model, my primary role in the development of humankind going forward is to provide assistance and support to individuals and organizations in a wide range of fields, such as education, healthcare, finance, and more. I can help people access information, analyse data, and make informed decisions. Additionally, my natural language processing capabilities can facilitate communication and collaboration between people who speak different languages or have different communication styles. Ultimately, my goal is to help people achieve their goals and make progress in their personal and professional lives, while promoting innovation and advancement in various fields.”