Generative AI

Artificial intelligence (AI) may power stocks for decades

It all started with the launch of the ChatGPT app in November 2022 – a shiny new chatbot powered by a nascent form of artificial intelligence known as generative AI. After just two months, 100 million people were using it, a feat TikTok took nine months to achieve and Instagram two years.¹ Though AI as a technology is nothing new, it’s clear this latest incantation has thunderously broad potential – capturing imaginations, a public narrative, and an awful lot of investor interest.

Trained on vast quantities of data, generative AI algorithms can produce instantaneous content – video, audio, text, and computer code – in response to prompts given to them in a naturalised, human form. As a result, observers believe Silicon Valley's rather clever data scientists and engineers have created a once-in-a-lifetime game-changing tool with the ubiquitous power to transform businesses and our lives.

It is why investors have been snapping up technology stocks sitting squarely in the crosshairs of the AI investment theme, driving US stock markets this year.

For those peering on, many are perhaps left wondering: is this really the game-changing tool investors think it is, or excessive hype and a laden bandwagon?

A printing press for our times

Drawing parallels in history with the advent of the printing press or the worldwide adoption of the internet, generative AI could transform the way we perform tasks at home, school and at work. What’s more, by reimagining how we access and synthesise information, companies may finally be able to boost productivity in the sizeable leaps they’ve been seeking for decades.

Generative AI is powerful in three fundamental ways

First, models are trained on huge quantities of unstructured data and have a wide knowledge base, meaning they can reach beyond the confines of narrow tasks to much broader applications. Second, they are instructed by the natural language we speak, doing away with the need for specialist programmers and complex code. Third, they are able to generate entirely new data in the form of content, producing text, computer code, audio segments and videos swiftly and at negligible cost.

As a result, the technology has the potential to optimise business processes in almost any industry across the planet. According to Goldman Sachs research, it could lift global labour productivity by one percentage point annually for the next decade at least.² It’s why CEOs on earnings calls have been scrambling to talk up their own ideas and uses for AI.

Opportunities ripe for the picking

The scope of potential applications for the technology is dumbfoundingly wide. Talk simmers over its use in ecommerce, education, autos, HR, healthcare, agriculture, gaming, marketing, finance, data security and travel & transport. And yet, in its current fledgling state, picking which company wins in terms of its application is perhaps a treacherous path for investors.

Alliance Trust Stock Picker SGA made the point, “Nobody truly knows where the development of AI will ultimately lead, nor the magnitude of the costs involved to get there, [but] it is clear that the timeline for businesses utilising new AI applications to enhance productivity has accelerated.”

Beyond ChatGPT, a handful of start-ups directly involved in delivering generative AI have emerged – for example Stable Diffusion and Midjourney for images, GitHub for code, Synthesia for video. But these are risky fledgling ventures with unproven business models and unreliable cashflows. As Alliance Trust Stock Picker GQG put it, “Profitability from such enterprises, at least as we sit here in mid-2023, is highly uncertain.”

Alliance Trust’s Stock Pickers have been casting an eye over the incumbent firms facilitating in the delivery of technology, which SGA remarked may benefit more than the disruptors. GQG used the analogy of “selling picks and shovels to 19th-century gold miners rather than betting on any individual miner themselves”.

As a result, Alliance Trust has invested in some of the more obvious beneficiaries in this regard: the mega-cap providers of cloud data centres and silicon chips that power the AI algorithms and train the models. In the Alliance Trust portfolio, these include such names as Alphabet, Meta, Amazon, Nvidia and ASML.

In addition, elsewhere in the Alliance Trust portfolio, the Stock Pickers have been finding less obvious beneficiaries, where AI models have the potential to optimise business operations and streamline product and service offerings; good examples are Stock Picker SGA’s investments in Intuit and Salesforce.

Beware the bandwagon

Given the strong AI-driven rally in stocks this year, Alliance Trust’s Stock Pickers are aware of the potential for hype and exuberance beyond the value the technology may create. Black Creek, for one, believes valuations in the mega-cap technology space may have reached “lofty” heights. This points to the potential for a pullback in US markets, where AI beneficiaries are seen to be concentrated.

What’s more, they are cognisant of the investment risks. These include question marks over the security of intellectual property, potential bias and toxicity within AI models, the ability for AI to “hallucinate” answers and spread disinformation, and the outcomes of a multitude of copyright lawsuits brought by those that claim they own the data on which the models are being trained.

All told, the consensus remains among investors that AI could be game-changing for society and businesses and is likely to unlock value across vast swathes of the stock market over the medium to long term. Over the short term, it has been likened to the age of alchemy prior to the development of chemistry as a scientific field. For the Stock Pickers at Alliance Trust, this means watching as the landscape evolves, and seeing which potions work first.

Marcus de Silva is a Freelance Investment Writer.

1. https://www.theguardian.com/technology/2023/feb/02/chatgpt-100-million-users-open-ai-fastest-growing-app

2. https://www.goldmansachs.com/intelligence/pages/ai-investment-forecast-to-approach-200-billion-globally-by-2025.html?chl=em&plt=briefings&cid=811&plc=body

This information is for informational purposes only and should not be considered investment advice. Past performance is not a reliable indicator of future returns. The views expressed are the opinion of Towers Watson Investment Management (TWIM), the authorised Alternative Investment Fund Manager of Alliance Trust PLC, and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as at September 2023 and are subject to change. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

TWIM is authorised and regulated by the Financial Conduct Authority. Alliance Trust PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731. Registered office: River Court, 5 West Victoria Dock Road, Dundee DD1 3JT. Alliance Trust PLC is not authorised and regulated by the Financial Conduct Authority and gives no financial or investment advice.