The AI revolution is no segway

Every year in technology there are advances and breakthroughs that are lauded as having the potential to fundamentally transform how we live and work. Sometimes they are truly revolutionary and the economic gains to be made are enormous; think of the transformative impacts of the internet and smartphones which gave rise to the modern-day corporate behemoths of Apple, Google, and Amazon. Then sometimes it is not, such as 3D TV’s, the Segway or the Juicero.

But beyond the pure commercialisation potential of a technological breakthrough, there is a second dimension to the investment case which is time. Because being too early can be the same as being wrong. Take autonomous and electric vehicles for example. Before I had kids, I fully expected that by now I’d be shipping them off to Saturday sport in an electric and autonomous vehicle while being able to watch their games and cheer them on from a personalised drone. Yet there I was last Saturday, some 9yrs later, standing in the mud and rain at a suburban field after battling morning traffic in my internal combustion engine vehicle. In the meantime, EV focused companies such as Faraday Future, Fisker, and Better Place have failed, while in autonomy, Ford and Volkswagen invested $3.6bn into Argo AI before it closed its doors and Uber gave up on any autonomous aspirations. And the 2019 Elon Musk promise of 1m robotaxis by the end of 2020 remains somewhere out on the distant horizon (along with my free time on Saturdays).

Turning to the present, and the past year has seen no shortage of tech-based hype. I sat in the Morgan Stanley TMT conference last year as many Venture Capital Fund titans thoughtfully espoused the virtues of Web 3, the metaverse and crypto architecture. And to be honest my eyes glazed over as it felt like these new technology concepts spanned a hammer looking for a nail, a niche application, and something that was a waste of resources. But there has been one piece of emerging tech that I think has genuine and immediate potential, and that is AI.

Artificial intelligence (AI) is one of the fastest growing and most disruptive technologies of our time. From voice assistants and self-driving cars to personalized medicine and financial analysis, AI is revolutionising the way we live and work. As a result, it has become a major area of investment for businesses, governments, and individual investors alike (FYI Chat GPT wrote that last section). It is a tectonic shift in technology opening a plethora of tangible use cases and commercialisation potential, and the timing is now.

Using Microsoft as an obvious example, the integration of AI across their platform creates tangible and valuable product extensions. Microsoft has close to 500m paying Commercial Office users and generates approximately $150 per user per year. One of the first AI product extensions for Microsoft is Teams Premium that comes with automatic minutes, personalised highlights, and AI generated summaries and action points, and comes with a list price of $10 per user per month (or $120 per user per year). This is an 80% uplift in base Commercial Office pricing for just one product extension. Roll these AI extensions out across the broader Office 365 product platform and the pricing uplift could be multiples of current levels. For reference, every additional $50 in average price per Commercial Office user adds $25bn, or 12.5% to revenue. And this is before any uplift in Azure cloud consumption also washes into earnings. Beyond Microsoft, there are the large language models themselves, the infrastructure to support the step up in compute intensity, the interfaces to facilitate application development and the applications themselves. The opportunities are multi-dimensional and significant.

In terms of timing, the reverberations of this AI inflection aren’t way off in the future but are happening now. IBM with their recent results announced the suspension of hiring for close to 8,000 back-office roles that they feel could be replaced by AI over the next 5yrs. And on 2nd May, Chegg became what looked like the first victim of the AI inflection with the online education support provider falling more than 40% following signs that Chat GPT is displacing their education support subscription services.  And the tip of AI related infrastructure demand is also already emerging in some recent earnings reports.

The value creation (and Chegg-like destruction) that will flow off the back of this AI inflection will rival that of the internet and smartphone, and I expect that a future Apple, Amazon, or Google with rise from this current period of dislocation. Whether this new giant is built around healthcare diagnostics, automation tools, financial advice or another realm is currently unclear.  But the explosion in investment opportunity that will unfold from this technological breakthrough is the most exciting thing to happen in years, if not decades.

Author: Trent Masters – Global Portfolio Manager & Technology Analyst

This material has been prepared by Alphinity Investment Management ABN 12 140 833 709 AFSL 356 895 (Alphinity). It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Any projections are based on assumptions which we believe are reasonable but are subject to change and should not be relied upon. Past performance is not a reliable indicator of future performance. Neither any particular rate of return nor capital invested are guaranteed.