From Connection to Cognition: AI’s Potential to Surpass the Internet’s Global Hegemony
EPIC Global Equity Fund
June 2023
The late Stephen Hawking once said “The rise of powerful AI will be either the best or the worst thing ever to happen to humanity. We do not yet know which”.
Hawking was not alone in his viewpoint as, over the last few years, numerous predictions have been made about the forthcoming artificial intelligence (AI) revolution and its potential impact on all aspects of our society, corporations, and life in general. However, few commentators challenge the expectation that one area where the emergence of AI could be hugely beneficial is in increasing the productivity, and in turn profits, of not just those companies providing the technology, but also those businesses willing and able to embrace it.
Even in these embryonic days of the technology, there already are signs that the productivity gains could be enormous. A recent study from the National Bureau of Economic Research tracked the results of a staggered introduction of an AI-based ‘conversational assistant’ using data from nearly 5,200 customer support agents. The results found that there was a 14% boost in issues resolved per hour. The study’s authors concluded “AI assistance improves customer sentiment, reduces requests for managerial intervention, and improves employee retention”.
Overall, the greatest impact was observed in new and low-skilled workers, with minimal impact on experienced and highly skilled workers. This was because the AI model “disseminates the potentially tacit knowledge of more able workers and helps newer workers move up the experience curve. Analysing the text of agent conversations, we find suggestive evidence that AI recommendations lead low-skill workers to communicate more like high-skill workers.”
The impact of AI on productivity is only just starting to be felt; this is the tip of the iceberg. Goldman Sachs recently issued a note on how AI has the potential to increase global productivity by 1.5% per year over the next ten years, in turn expanding global GDP by 7% (or approximately $7 trillion) and supporting growth in company profits. Companies in the S&P500 are expected to see their profits improve by 30% or more over the next decade.
Recognising the transformative potential of AI, we strategically increased our exposure during last year's downturn.
Nvidia has been the obvious picks and shovels play. CEO Jensen Huang asserts that the use of AI technology is still in its infancy, and we are at the beginning of a ten-year cycle. Nvidia estimates a total addressable market of $100 billion for gaming, $300 billion for chips and systems, $150 billion for artificial intelligence enterprise software, $150 million for omniverse enterprise software, and $300 billion within the automotive industry.
Beyond hardware, there are numerous other beneficiaries offering greater value. Well-resourced corporations equipped with technical expertise and access to proprietary data are best positioned to capitalise on the AI mega trend.
Microsoft's partnership with OpenAI has positioned the company as one of the leaders in this technological breakthrough. Morningstar estimates that AI will contribute an additional 50 to 100 basis points of annual revenue growth for Microsoft over the next decade, predominantly due to incremental revenue for Microsoft 365, GitHub and Dynamics 365 amongst others.
Meta Platforms had projected a $10 billion revenue loss in a single year due to changes in Apple's iOS operating system, yet the company has mitigated this impact by relying on AI. The progress has been astounding. Furthermore, the company leverages AI not only for advertising but also extensively in content moderation to identify and remove inappropriate or harmful content.
AI's benefits extend beyond the tech giants and are being harnessed by companies across various industries. Take the healthcare sector; according to the National Institutes of Health, the amount of genomic data being generated is approaching 40 billion gigabytes each year. The ability to share, analyse, and interpret genomic data is critical to unlocking discoveries that will advance understanding of human health and improve precision medicine.
Just a few days ago, Illumina Inc, the global leader in DNA sequencing and array-based technologies, announced the new PrimateAI-3D, an AI algorithm that predicts disease-causing genetic mutations in patients with unprecedented accuracy.
By applying the PrimateAI-3D algorithm to nearly half a million individuals in the UK Biobank, Illumina scientists and academic collaborators identified rare pathogenic mutations. PrimateAI-3D also significantly improved the accuracy of genetic risk prediction, demonstrating the first polygenic risk scores largely unaffected by ancestry bias.
"The application of the latest advances in AI to genomics opens tremendous opportunities for Illumina in both genetic risk prediction and drug target discovery by decoding the basis of complex genetic diseases such as diabetes, heart disease, and autoimmune diseases," said Alex Aravanis, Chief Technology Officer of Illumina.
In the realm of investing, legendary figure John Templeton wisely cautioned against the dangerous allure of the phrase "this time is different." Yet even Templeton acknowledged that on occasions, indeed around 20% of the time, this time can be different.
With AI’s potential to expedite revenue growth and streamline operations, the prospect of stronger margins, enhanced profitability, and, above all, augmented returns on invested capital – the very lifeblood of shareholder returns – beckons tantalisingly.
In the face of a complex macro environment that has left investors searching for clarity, we believe we are in the very beginning of what could transpire to be the next industrial revolution.
We have recently made a minor adjustment to the Fund’s allocation to Nvidia, to reflect our concerns regarding its valuation. While we still believe there is significant potential for upside at current price levels, it is important to acknowledge the associated risks. However, it is worth noting that overall the valuations of the AI-exposed positions held by the Fund remain reasonably conservative.
If our expectations in respect of AI are realised, the Fund stands to benefit greatly. On the other hand, should our assumptions prove to be incorrect, the potential negative impact on the Fund should be mitigated as, in many cases, the AI optionality is not priced in at time of writing.
Malcolm Schembri & Graeme Brewer
Fund Managers