Where to look for promising AI gems

 Where to look for promising AI gems

Assuming you had invested $10,000 in Apple when the first iPhone was announced in January 2007, your investment would have grown significantly and be worth approximately $446,000 today, without taking into account any dividends that may have been paid out during that time.

 

It is true that investing in companies that display transformative innovation has historically generated substantial returns. Such companies are often at the forefront of technological advancement, and their innovative products or services can disrupt entire industries, leading to significant growth in their stock prices.

 

Looking ahead 16 years from the launch of the first iPhone, we find ourselves at the brink of an artificial intelligence (AI) revolution. Microsoft founder Bill Gates recently wrote in a blog post that the development of AI is just as significant as the creation of the microprocessor, the personal computer, the Internet, and the mobile phone. Gates' statement highlights the transformative potential of AI and suggests that companies at the forefront of this technology could be poised for significant growth in the years to come.

 

Gates has expressed his belief that AI has the potential to revolutionize various aspects of human life, including work, education, travel, healthcare, and communication. He anticipates that entire industries will be reoriented around AI, and companies that effectively leverage this technology will stand out from the competition. The transformative impact of AI on society and the economy is expected to be significant, and companies that embrace AI could potentially realize substantial benefits.

 

While AI undoubtedly holds great promise, we believe that investing solely based on the hype surrounding this technology could be risky. It is important for investors to carefully evaluate companies and their AI initiatives to determine their potential for long-term success. That being said, there are certain sectors that investors may want to consider exploring for promising AI opportunities. These sectors include healthcare, finance, and technology, as these industries are among the early adopters of AI and have shown a willingness to invest heavily in this technology. By conducting thorough research and due diligence, investors can identify companies within these sectors that have the potential to benefit from the growth of AI.

 

The economy of artificial intelligence

 

According to PwC, a leading professional services firm, AI has the potential to contribute as much as US$15.7 trillion (S$20.8 trillion) to the global economy by 2030. Of this amount, an estimated US$6.6 trillion is expected to come from productivity gains. This could include AI-enabled support for educators grading exams, software developers writing or debugging code, or online content providers selling and advertising products and services more effectively. The significant economic impact of AI underscores the potential for companies that successfully leverage this technology to realize significant gains in productivity and profitability.

 

AI has already become a ubiquitous part of our daily lives, and we often interact with it without even realizing it. For instance, many logistics and delivery providers heavily rely on AI-powered applications to optimize the most efficient and cost-effective route to deliver your parcel to your doorstep. This is just one example of how AI is transforming traditional industries, making them more efficient and responsive to consumer needs. As AI technology continues to evolve and become more sophisticated, we can expect to see even greater adoption and integration of AI across various sectors of the economy.

 

Here comes the intelligent chatbot.

 

ChatGPT, an online chat assistant, has become one of the hottest trends of 2023, impressing users with its impressive "intelligence" and generative abilities. Incredibly, ChatGPT was able to reach one million users in just five days, a feat that took Facebook 10 months and Netflix 3.5 years to achieve. This remarkable growth rate underscores the growing demand for conversational AI and the potential for AI-powered chat assistants to transform the way we interact with technology. As AI technology continues to evolve and improve, we can expect to see even more innovative applications of conversational AI in the years to come.

 

What sets ChatGPT apart from other AI products and services is its generative AI capabilities. While traditional AI can read and write, generative AI has the ability to understand and create new content. This technology has the potential to revolutionize various industries, including education, entertainment, healthcare, drug development, and investing.

 

Experts and thought leaders are actively exploring the possibilities of generative AI in these fields. For example, generative AI-powered educational tools could personalize learning to fit individual student needs, while generative AI-generated entertainment content could create new forms of immersive storytelling. In healthcare, generative AI could aid in the development of new therapies and drugs, while in investing, it could be used to generate predictive models for investment strategies.

 

The transformative potential of generative AI is significant, and as this technology continues to advance, we can expect to see even more innovative applications of generative AI in various industries.

 

Pockets of possibility

 

It's important to note that pure AI equity opportunities are relatively rare, and many of the most advanced AI functionality is either privately held or housed within larger companies with diverse sources of revenues.

 

As such, we believe that investing in companies that provide the computing power and infrastructure to accommodate the growth in AI represents a major potential growth opportunity. This includes companies that manufacture the most advanced semiconductors and cloud providers who can offer scalable and flexible computing power. These companies can benefit from the increasing demand for powerful computing systems needed to support the growth in AI applications.

 

Investing in such companies offers a way to gain exposure to the growing AI market, without taking on the risks associated with investing in pure AI equity opportunities. Moreover, companies that can provide the necessary computing power and infrastructure are well-positioned to benefit from the continued expansion of AI across various industries.

 

In addition to hardware manufacturers and cloud providers, other enablers and adopters of generative AI within the ecosystem also stand to benefit. Companies that supply lithography equipment to manufacture advanced chips and high-precision lens manufacturers can play a crucial role in the development of AI technology, and may also see increased demand.

 

Moreover, semiconductor capital-equipment companies that produce the machines required for chip manufacturing will also benefit from the growth in AI. Adopters who integrate AI technology into their processes should also see increased demand, leading to growth opportunities for their businesses.

 

Lastly, cybersecurity companies are another potential winner as the adoption of AI will increase the demand for robust security measures. As AI systems generate, store, and process large amounts of sensitive data, ensuring their security is a top priority for companies that use AI. As such, cybersecurity companies that can provide robust security solutions to protect these systems are likely to see an increase in demand.

 

Investors can therefore explore opportunities in these companies that support the AI ecosystem and are poised to benefit from the growth in AI adoption.

 

Is there another way?

 

On the other end of the spectrum, there are early-stage companies that investors can gain access to through venture capital (VC) or private equity funds. These funds provide funding and/or resources to a number of high-growth emerging companies, with the hope that one or more will grow multifold.

 

VCs have been actively investing in generative AI, increasing their positions from US$408 million in 2018 to US$4.5 billion in 2022. While it can be rewarding to unearth the next Facebook or Google, VCs may run out of funding and end up with a portfolio of underperforming companies, leading to suboptimal returns for investors.

 

Investors should exercise caution when investing in these early-stage companies, as they carry a higher risk profile than more established companies. However, for those willing to take on higher risk, investing in VC or private equity funds focused on generative AI can provide access to potentially high-growth companies that are at the forefront of AI innovation.

 

That's correct. In Singapore, investments in VCs are often exclusive and require large investment amounts, making them inaccessible and impractical for most retail investors. Additionally, VC investments typically have long lock-in periods of up to 10 years or more, which may not be suitable for investors who require liquidity or have shorter investment horizons.

 

As such, retail investors may consider investing in publicly traded companies that are part of the AI ecosystem, such as semiconductor manufacturers, cloud service providers, and cyber-security firms, as these companies stand to benefit from the growth in generative AI adoption. These companies offer investors greater liquidity, transparency, and the ability to invest with smaller amounts of capital.

 

Pitfalls to avoid

 

The success of ChatGPT has generated hype and led to a surge in related stock prices, but this knee-jerk reaction is not uncommon in the market. Similar surges were seen in metaverse-related and listed crypto companies in 2020 and 2021, but the decline in share prices of these sectors and beyond is evident as global central banks increase interest rates to curb inflation.

 

A recent Citi Global Wealth Investments report suggests that growth investing is unlikely to mimic the euphoric markets of the past two years, as shares, coins, or NFTs that lack sustainable value trajectories are no longer expected to experience indiscriminate outperformance.

 

Yes, those are all important risks to consider in the context of generative AI. As the technology advances and becomes more widely adopted, it's likely that we'll see increased regulatory scrutiny, especially around issues of privacy and data protection. Companies that are involved in generative AI will need to be proactive in addressing these concerns and implementing strong safeguards to protect user data and prevent misuse of the technology. In addition, patent disputes and intellectual property issues could arise if companies start to compete more aggressively in the space, and it will be important for companies to have strong legal protections in place. Overall, investors should be aware of these risks and do their due diligence before investing in companies involved in generative AI.

 

That's a good point. Digitalisation is a long-term trend that has been transforming various industries for some time now, and generative AI is just one aspect of it. Companies that are well-positioned to benefit from digitalisation as a whole, such as those that provide hardware, software, cloud services, and cybersecurity solutions, are likely to continue to thrive regardless of short-term market fluctuations or regulatory changes related to specific applications of AI.

 

A sensible strategy

 

That's a wise perspective. Diversification across industries and sectors is a prudent way to mitigate risks and to benefit from broader trends. As Buffett has famously said, "diversification is protection against ignorance. It makes little sense if you know what you are doing." While generative AI may be an exciting and promising area, it is important to remember that it is just one part of a wider trend of digitalisation. Investors should consider their risk tolerance and investment objectives before making any investment decisions.

 

Thank you for your time and insight. It was a pleasure assisting you.