Artificial Intelligence - opportunities in more than big tech

540184720026Artificial Intelligence, known as AI has been a hot sector so far in 2023.  Computer chip designer Nvidia Corp, the current poster child of AI, has seen its share price rise around 200% this calendar year, while Microsoft is up around 50% so far this year.

The recent excitement has been ignited by the development and release of AI powered technologies with the most high profile being ChatGPT, an AI chatbot which is trained to follow a conversational instruction and provide a detailed response.  This format makes it possible for ChatGPT to answer follow up questions, admit its mistakes, challenge incorrect premises and reject inappropriate requests.  This was developed by OpenAI and released in November 2022.

Adrian Lu, an investment analyst at Magellan Financial Group describes AI as computers capable of thinking and understanding the world around them, that is they can reason, learn and act with autonomy.  He believes the pinnacle of AI is likely to be far away but engineers are getting better at building models that can mimic human perception, behaviour and abilities.  These models can already perform tasks better and faster than humans which promise vast productivity gains, as well as potential threats to investors.

Andrew Clifford, CEO at Platinum Asset Management says investors are excited that AI could be a major disruptive force in the global economy.  It reminds him a lot of the excitement around data on mobile phones back in 1999 when NTT DoCoMo first pioneered full internet access on a mobile phone in Japan.  It took around 5 years for that to translate into widespread economic outcomes and significant revenue for a company like Research in Motion (maker of Blackberry) which was then decimated by the release of Apple’s touchscreen iphone in 2007.  With that in mind Clifford is of the view that AI could be a genuine investable theme, but investors need to be careful in this initial period of excitement.

Investors have been quick to identify many of the primary beneficiaries of the ongoing development of AI already.  Lu characterises these as the ‘enablers’ of AI and highlights that many technologies had to come together to make AI possible, from semiconductors to software to hyperscale data centres.  Some of the leading companies in these enabling technologies have been among the greatest beneficiaries of the acceleration in AI spending so far, including Microsoft in enterprise cloud computing, Nvidia in AI accelerator chips, ASML in chipmaking equipment and TSMC in leading-edge manufacturing.  Investors now need to assess whether the current share prices of these companies represent an opportunity or a bubble.

Other beneficiaries from AI range from Industrial automation, consumer devices, automotive and healthcare are yet to be fully appreciated by the market according to Bianca Ogden, portfolio manager at Platinum Asset Management.  In the healthcare sector Ogden points to research and drug discovery.

AI is used to assist and ultimately design new therapies (small molecules and biologics) that have the desired attributes. The issue today is that the process from target to lead compound takes roughly 4-5 years and requires testing of a large number of molecules that then have to be refined over and over again.  AI is showing great promise to reduce that timeline significantly. Oxford-based Exscientia is one of these companies leading the way here and working closely with Sanofi, a company that has put together an impressive network of AI partners. Vancouver-based Absci is another interesting company who is working closely with Nvidia to make the discovery of antibody therapeutics more efficient using its own wet-lab generated database along with AI tools.

Lu highlights some of the risks to investors with AI including political and regulatory risks that will touch companies in different ways, and not just the AI enablers.  In particular intellectual property ownership, misinformation, data privacy and jobs displacement are among the key issues.

Clifford says that from an investment standpoint, the risks he is most mindful of are valuation risk (i.e. paying too much for an investment) and the risk of technological disruption. We remember Kodak, Blockbuster Video and Blackberry, where their businesses were decimated by new technology. It is very likely that AI will have that impact on various businesses over the coming years.

Technology moves fast and investors need to balance their thinking between the opportunities and the threats from AI.


Mark Draper (GEM Capital) writes monthly for the Australian Financial Review - this article appeared in the 28th June 2023 edition.