Tuesday 27th of June 2023
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The recent and remarkable rise of generative artificial intelligence (AI) systems has captured the attention and imagination of the world. ChatGPT being the most discussed (although there are many other generative AI systems producing very impressive outcomes), there is already talk of a new technology revolution driven by AI systems.
Our investment team has trialled ChatGPT and it has become a useful tool in our work process. Many others we speak to across different industries are finding novel uses for generative AI to support workflows and improve productivity. We are believers in AI systems eventually heralding a new age of technological progress.
As with all new technologies with the potential to change the world, generative AI has also captured the attention of equity markets! Stocks deemed to be potential ‘winners’ from the AI revolution have seen dramatic increases in market valuations over just a few months.
The poster child of this recent short-term trend has been the chip designer Nvidia, which has seen its share price rise +192% in 2023, the company’s market value is now greater than $1 trillion. Other tech firms like Microsoft who are thought to have a lead in AI have seen significant share price rises too.
We think Nvidia, and Microsoft for that matter, are both fantastic businesses with great technology, and both are undoubtedly at the forefront of AI today. But both businesses also command high valuations too. This leaves little upside for investors who want to take a position in the evolving AI story.
Sometimes in markets as an active investor, when everyone is looking one way, it pays to look the other way. In fact, it’s always worth looking the other way, even if you don’t make any investments!
What do we mean by ‘looking the other way’? Well, the consensus in markets today on AI is that, as investors, we need to pick the ‘winners’, the companies who are going to see accelerated revenue growth and profits from the AI revolution.
But what about the perceived ‘losers’ from AI. Looking the other way in this context means, looking at the companies the market thinks are going to lose from AI. Maybe there are opportunities there?
It’s very early days with this new technology in generative AI. Past cycles of new technologies teach us that the expectations of how quickly a new technology will change the world are often overly optimistic early in the cycle. The internet really was going to change the world, the tech evangelists were right about that in the 1990s, but it still took decades for that to happen in practice. It’s also incredibly hard to predict how a new technology will be implemented, and who the winners or losers will be.
Meanwhile the market has already punished the share prices of many companies who are thought to be at risk from AI.
A good example of this is in outsourced customer care services, where large companies and governments outsource call centre and helpdesk services to companies who specialise in the provision of these services.
At a very basic level, it seems quite obvious that some call centre jobs are likely to be replaced with generative AI systems like ChatGPT. But it is also quite naïve in our view to assume that that it is necessarily bad for the companies in question.
Imagine, for example, a large government department who outsources visa application call centre and helpdesk services to a large expert company in the field. That same department is not going to go to OpenAI (creators of ChatGPT) and request the entire call centre service is moved over to ChatGPT. OpenAI wouldn’t want them to do that either.
The obvious outcome from this user case example is that the existing service provider integrates ChatGPT into their existing service offering, with humans and AI working together to provide a better and more effective service to the end client.
The end client is happy, since it gets a more efficient service that works. OpenAI is happy because its AI system is being used. And the service provider is happy because it is now offering a better product to existing clients.
If anything, AI may be a tailwind to these call centre outsourcer companies. They might end up being AI ‘winners’, rather than ‘losers’. But their share prices have declined because the market (incorrectly, we would argue) is assuming AI must be bad for call centre services.
This kind of short-sighted, poorly researched thinking in markets creates opportunities for the thoughtful investor! And there may be many more opportunities where the market is assuming businesses will lose out from AI.
We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.
Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.
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