Artificial intelligence has been around for decades. However, in 2023 we saw a new wave of enthusiasm around the technology, sparked by the rise of what is broadly defined as Generative AI.
So, what is Generative AI and how is it different to other forms of the technology?
In plain language, Artificial Intelligence has traditionally referred to teaching computers to learn from data and make decisions or predictions based on that learning. In contrast, generative AI is a form of AI, which can create new, original, tailored
content (text, images, videos, music and even software code) based on what is learned.
In short, Generative AI represents the latest inflection point in the evolution of AI. The creative capability of GenAI is a significant leap forward as it has long been assumed that creativity is uniquely human.
On a more holistic basis, Generative AI might not only bring the power of AI itself to the masses but is likely to accelerate the wider democratisation of innovation.
The rise of Generative AI has been driven by significant advances in two underlying technologies: 1) Natural Language Processing (NLP) which is a computer’s ability to receive instructions and give outputs to human users in conversational language
and 2) Large Language Models (LLMs) which are neural networks that utilise training sets containing billions of inputs (called parameters) to serve as the basis for the model.
Importantly, the “unit cost” of LLM training has also come down materially as graphics processing units (GPUs) and application-specific processors (ASICs) have become more powerful and efficient. These advances have come alongside simultaneous
improvements in the economics of cloud computing.
In early 2023, the evolution of these technologies led to the launch of ChatGPT 3 – a powerful yet consumable format, where anyone could use the technology in a quick and easy manner. ChatGPT quickly became the fastest-growing consumer internet
app of all time, amassing an estimated 100 million monthly users in just two months.
However, ChatGPT barely scratches the surface in demonstrating the potential of generative AI, which is likely to have a broad range of real-world uses and a potentially profound impact on productivity. For instance, in areas such as office productivity,
generative AI tools are being deployed to write emails, model financials in real-time, as well as to write and refine software code. In the healthcare industry, generative AI is already being applied to areas such as drug discovery, an area that has
historically been a convoluted and resource intensive process. But being able to use large AI models to analyse pathogens and biomolecules at a rate that’s significantly faster than what a human can do should accelerate the drug deployment process
and, hopefully, help to find cures at a faster rate.
What is striking about the generative AI theme is its size, duration, and reach, not to mention its pace of advancement. According to McKinsey, the global generative AI market could reach $1.8trn by 2030 and add $4.4trn in annual value to the global economy
through productivity gains, representing a vast investment opportunity, as well as potential risk for industry laggards and those ill-equipped to adopt the technology1.
Global Team View
At EdenTree, we see generative AI unfolding in three waves:
- Infrastructure – the “picks and shovels” – the companies developing semiconductor content that enables and powers the training and inference of AI models, as well as cloud services providers, which host the intensive AI activities
on their platform. These companies have already experienced strong demand for their solutions and this trend should persist given the robust technology investments expected in the coming years.
- Software – the firms offering software applications and industry-specific AI solutions, also appear well-positioned in the near term. For software companies, AI presents the potential to deliver significantly more value to customers, and thereby
increase pricing. Those equipped with engaged users, established workflows with those users, and proprietary data have considerable advantages.
- End-markets/AI Adopters – Companies that will utilise AI to distinguish their business models represent yet another wave of investment opportunities. According to OpenAI, there are more than two million developers and more than 92% of Fortune
500 companies building AI tools based on the company’s products2.
On the Global Team at EdenTree, we hold a number of investments in each of these segments of the AI value chain. For instance, Taiwan Semiconductor Manufacturing Company (TSMC) has become the common denominator in advanced computing, providing the manufacturing
and packaging capabilities for the leaders in AI chip design (NVIDIA and AMD). Additionally, Microsoft is rapidly becoming a global leader in AI, with the company’s Azure cloud platform providing organisations of all sizes with the technological
resources to build, train and utilise powerful AI models, as well as product innovations such as Microsoft CoPilot, which infuses AI across each layer of the firm’s infrastructure and application stack. And among the AI Adopters, Medtronic has
built the world’s first AI-assisted colonoscopy tool to help physicians detect the key symptoms of colorectal cancer.
Overall, generative AI is a new investment factor that forms part of our broader, constructive long-term investment case surrounding technology, rather than an investment case outright. As a reminder, our longstanding view is that, as powerful technologies
such as cloud computing and artificial intelligence converge, they are increasingly well-positioned to capture a larger share of the global economy. This is an important distinction as we believe that (similar to previous tech eras), there is a high
likelihood of non-linear progress within AI, and therefore discerning the hype from reality will be critical for investors, requiring a greater level of agility and valuation discipline going forward.
This document has been prepared by EdenTree Investment Management Limited for Financial Advisors, other intermediaries and other investment professionals only. It is not suitable for private individuals. This document has been produced for information
purposes only and as such the views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest thereto. A full explanation of the characteristics of the investments is given in the Key Investor Information
Document (KIID). Any forecast, figures, opinions statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, EdenTree Investment Management’s own at the date of this document. They are
considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecast made will come to pass. Please note that the value of an investment and the income
from it can fall as well as rise as a result of market and currency fluctuations, you may not get back the amount originally invested.
Past performance is not necessarily a guide to future returns.
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