With all eyes on generative AI (genAI) and its transformative potential, individual investors’ interest has been piqued. The market-moving innovation certainly has generated a lot of hype ― and questions. Equity CIO Tony DeSpirito parses three reasons for excitement and three areas for awareness.
GenAI has commanded attention and moved markets this year, earning comparisons to the internet and smartphone for its transformative potential. We believe genAI is also setting up to be a key contributor to market dispersion, as it has potential to send some businesses soaring while disrupting or displacing others. We sponsored some internal debate on the topic and offer the following observations on this critical innovation:
Worthy of excitement
1. Universal application
Unlike other technology innovations that had fleeting fame before fading to the background, we see genAI having far-reaching and lasting impact. Leaders of our technology team believe its usage is poised to be unprecedented relative to prior innovations with more limited scope (e.g., 3D printing, augmented reality, metaverse). The key distinction: GenAI is a platform with elements of humanlike intelligence that give it universal applicability that can extend across industries, businesses and disciplines.
Companies selling the “picks and shovels” of the AI gold rush are the initial beneficiaries. The early rewards for users are likely to take the form of cost savings ― eliminating some jobs while making humans more efficient at others. Later in the AI evolution, we expect to see the emergence of new revenue-generating business models.
2. Investment opportunity now ― and for years to come
GenAI is evolving and the realization of its full merit will take time, making this a multi-decade opportunity. Yet companies are spending real money on genAI now in an effort to harness its enormous potential. In the building phase, the investment opportunities reside primarily in the technology space. The key is to know where we are in the AI lifecycle and what portions of the technology “stack” may be positioned to benefit.
Consider this: The substantial investment in the current internet, which is powered primarily by CPU chips, will transition toward GPUs (the graphics processing units that are optimized for AI). We see the creation of an AI-supported web driving years-long investment opportunities.
We view investing in genAI as an active pursuit, given the need to be nimble and know where the opportunity is at each stage of progress. An analysis of the technology stack (shown below) illustrates current and potential opportunities ― all subject to change as genAI itself sharpens, smartens and evolves.
The genAI technology investment stack
What it is
Where to invest
IV. Tools & applications
The tools to create apps and the actual instruments and apps powered by generative AI.
Companies that build apps and the tools to create them. Existing apps will be enhanced; many start-ups likely to emerge.
The information upon which
Suppliers of information and analytics, and those involved in data staging. AI makes private data more useful and, therefore, more valuable.
II. AI models
The software required to train
Companies involved in the research and development of AI learning and language models.
I. Infrastructure & cloud
The hardware and computing resources needed to enable AI function and growth. Includes GPUs, storage and memory.
Cloud service providers building AI-enabled data centers; semiconductors and makers of chip manufacturing equipment are critical inputs.
Source: BlackRock Fundamental Equities, September 2023.
3. Opportunity well beyond tech
Beyond the impacts and opportunities in the technology sector are the eventual use cases for AI that will emerge throughout the economy. Call centers will likely be replaced. Elsewhere, the uses may be less transformative and more nuanced, such as an AI-powered co-pilot added to an existing software package. We see public and private investment opportunities from AI, with many early-stage opportunities perhaps best expressed through private investments.