ARTIFICIAL intelligence (AI) stands at the heart of an extraordinary digital transformation, reshaping industries, redefining consumer experiences and creating new opportunities for investors. As AI advances, it promises to transform the way we work, and the products and services we consume across every sector.
From cloud computing and semiconductor innovation to next-generation energy solutions, AI has ignited technological progress across the technology stack, providing us with opportunities to invest in companies that are leaders in, or beneficiaries of, this transformation.
The explosive growth of AI applications, particularly in generative AI, has profoundly changed what businesses, investors and consumers expect from technology. AI’s ability to automate complex tasks, create novel user experiences and optimise resources has moved it from the periphery of innovation to the centre of both the tech industry and the global economy.
The public release of OpenAI’s ChatGPT in 2022 catalysed an unprecedented innovation cycle, with cloud service providers and others racing to advance the technology. As AI continues to embed itself in more applications and infrastructure, it is increasingly clear that this technology is evolving into a general-purpose force with the potential to influence every aspect of life.
AI is everywhere
The technology’s rise is closely tied to the progression of cloud computing, the Internet of Things and other foundational technologies including semiconductors, networking equipment, cybersecurity and alternative energy. Leading technology companies and AI developers are investing heavily in improving and deploying large language models, machine learning algorithms and other sophisticated tools.
In their pursuit of a competitive edge, these companies are allocating billions of dollars to build data centres, secure advanced graphics processing units (GPUs), and develop the foundational models powering AI.
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Generative AI is particularly compelling as a versatile, general-purpose technology that already supports a range of applications, from content generation and personalised recommendations to predictive maintenance and medical diagnosis. As these models advance in their ability to process non-text inputs, such as audio, images and videos, we anticipate an even broader set of applications.
Healthcare is particularly noteworthy in its applications of AI. For instance, a medical centre in Taiwan improved doctor and pharmacist productivity after implementing AI co-pilots. Doctors now spend only 15 minutes writing medical reports compared to an hour previously, while pharmacists have been able to double the number of patients they see per day. Additionally, AI also helps to develop new protein structures, which have widespread implications across drug discovery and biotechnology.
Will return on investment catch up?
Developing and deploying generative AI technologies, however, requires significant capital. Major technology companies are investing massive resources in a bid to lead the AI race, but the market is questioning whether these companies can earn a good return on investment (ROI).
For context, we estimate the major US cloud service providers and a leading social media company investing in generative AI will increase their combined capital expenditures by more than 50 per cent year over year to more than US$175 billion in 2024. This substantial outlay reflects both an opportunity and a challenge, as a lag exists between the initial R&D and the eventual monetisation of AI capabilities.
Nonetheless, long-term ROI remains promising. In the past, this group has generated over 20 per cent returns on invested capital (ROIC) on average. While early AI investments may place short-term pressure on returns, we expect ROIC to strengthen over time as AI adoption grows and new monetisable applications emerge.
One crucial factor impacting the economics of AI investment is the high cost of GPUs, which are currently indispensable for training and running AI models. We believe that returns on these investments will be attractive in the long run, given that both price and performance of GPUs are expected to increase, though the level of ROI will likely vary considerably across companies.
Those that can move beyond basic infrastructure and develop distinctive AI applications or services may be best positioned to drive revenue growth, capturing the financial rewards of the technology’s transformation over time.
Alongside its transformative potential, AI also brings risks, uncertainties and disruptions. The rapid proliferation of generative AI has drawn attention to critical issues such as regulatory oversight, data privacy, cybersecurity and intellectual property rights. Stricter regulatory frameworks could temper the pace of AI innovation, potentially impacting demand for AI infrastructure and affecting investors’ returns.
However, we believe that fundamental questions around fair use, data rights and attribution may not have answers for several years as high-profile cases work their way through the US legal system.
Discerning what’s real from fake
Ensuring the accuracy and fairness of AI-generated outputs is another pressing concern. Current models are prone to generating “hallucinations”, or outputs containing incorrect or misleading information. For AI to remain reliable, developers must invest in diverse, high-quality training data, implement effective governance, and establish compliance protocols that align with enterprise standards. These steps not only improve the quality of AI-generated content but also reduce the risk of bias.
As the volume of synthetic content generated by AI grows, it would not surprise us if the amount of synthetic content one day dwarfs that of all human-generated content throughout history. But the ease with which generative AI can produce content also raises questions about authenticity. It will be imperative for users to discern what is real from what is fake. Innovations such as unique identifiers or digital watermarks may help users understand the source of content in the future.
Harnessing opportunities while managing risks
AI is the most important technology theme since the dawn of the Internet age three decades ago. As it evolves and becomes more pervasive, investment opportunities are expanding beyond a small group of major tech giants to a broader universe of enablers and beneficiaries, including foundational technology providers, data companies and industry-specific adopters.
As there are several risk factors and uncertainties associated with the technology, we believe an active approach to investment management is required to capitalise on the positive trend while avoiding the pitfalls.
The writer is lead portfolio manager of BNP Paribas Disruptive Technology Fund, BNP Paribas Asset Management
