Fintech
UBS’s framework for sizing and seizing AI investment opportunities
The launch of ChatGPT marked a watershed moment for AI and its adoption, and the range of problems that AI can address continues to grow rapidly. In his new report Artificial Intelligence: Scaling and Seizing Investment Opportunities in AI, UBS GWM’s CIO outlines a value chain-driven framework for the AI investable universe, describing value creation in the AI sector from a bottom-up perspective.
According to the report, the fortunes of different parts of the value chain are likely to vary even in a rapidly growing industry, due to rapid innovation, evolving competitive dynamics and changes in investor sentiment. Identify three layers that feed each other vertically:
- Qualification level: Companies that provide the backbone for AI development, ranging from semiconductor manufacturing to chip design, cloud and data centers, and companies involved in energy supply. Value creation is expected to amount to $185 billion by 2027.
- Intelligence level: Companies that transform computing and energy resources from the enabling layer to intelligence, such as those that develop large language models and those that have data assets that can be transformed into intelligence. Given the small base, this layer will likely show the strongest growth in 2027.
- Application level: Companies incorporating tools from the intelligence layer into specific use cases. This level arguably offers the greatest potential for monetization over time, but this opportunity is difficult to quantify at this early stage. Currently, the report predicts a directly addressable market of $395 billion in application layer revenue opportunities by 2027.
The creation of economic value by level provides important information because each level must create sufficient economic value to justify the costs of the previous level. One of the key ratios to keep an eye on is therefore the relationship between the monetization potential of the application layer and the costs of the enabling and intelligence layers. This will likely become a key metric for investment returns.
The impact of AI on sectors and sustainable development
While AI is expected to have a neutral to positive impact on company revenue and operating margins for most industries, the report finds that pricing power could suffer for several industries if AI has an impact deflationary on products and prices. Some industries are accustomed to the technological revolution, but for others, artificial intelligence will represent a bigger challenge and companies will have to quickly adapt their business models to remain competitive in the market. Many of these AI-driven changes could also have sustainable development implications, as the technology enables society to use resources more efficiently and provide much-needed products and services to remote and/or disadvantaged communities.
How to invest in the future of artificial intelligence today
The potential of the AI market is vast. The report estimates that value creation from AI could amount to nearly $1.2 trillion by 2027 and presents four key considerations for investors to seize this investment opportunity:
- Be sufficiently invested. Many investors have created at least some exposure to AI in recent months. However, the pace of growth in the sector means many investors remain under-allocated overall.
- Tilt towards the enable level. While there is a risk that fears of overcapacity in the enabling layer could trigger volatility, the report finds that the segment currently offers the best mix of attractive and visible earnings growth profiles, strong competitive positioning, reinvestment runway and reasonable assessments.
- Mega-caps are central to the history of artificial intelligence. The race for artificial intelligence has so far seen the biggest tech companies benefit the most. A feature rather than a bug of the new AI investment landscape, as the report predicts that the AI market will be dominated by an oligopoly of vertically integrated “foundries” and monolithic players along the value chain.
- It’s not just about the United States. China’s tech monoliths are still trading at similar valuations to those prior to ChatGPT’s launch. However, they are also investing heavily in artificial intelligence. Ultimately, China is expected to develop an AI ecosystem different from much of the rest of the world, which should lead to significant monetization potential.