The launch of ChatGPT marked a turning point for AI and its adoption, and the range of problems AI can solve continues to grow rapidly.
In his new report, “Artificial Intelligence: Sizing and Exploiting the Investment Opportunity,” UBS GWM CIO outlines a value chain-led framework for the investable AI universe and describes value creation in the AI industry from a bottom-up perspective.
According to the report, even in a fast-growing industry, the fate of different parts of the value chain is likely to differ due to rapid innovation, evolving competitive dynamics and changes in investor sentiment. It identifies three layers that drive each other vertically:
Supporting layer: The companies that form the backbone for AI development, from semiconductor production to chip design to cloud and data centers to companies dealing with power supply. By 2027, the value added is expected to be $185 billion.
Intelligence layer: The companies that convert the base layer’s computing and energy resources into intelligence, e.g. B. those who develop large language models and those who have data sets that can be converted into intelligence. Due to the small base, this layer is expected to show the strongest growth until 2027.
Application layer: The companies that embed the tools from the intelligence layer into specific use cases. This tier likely offers the greatest monetization potential over time, but this opportunity is difficult to quantify at this early stage. Currently, the report projects a directly addressable market of $395 billion in application layer revenue opportunities by 2027.
Economic value added per shift provides important information because each shift must create enough economic value to justify the costs of the previous shift. One of the most important metrics to monitor is therefore the ratio of the monetization potential of the application layer to the cost of the enabling and intelligence layer. This will likely become a key metric for investment returns.
The impact of AI on sectors and sustainable development
Although AI should have a neutral to positive impact on company revenue and operating margins in most sectors, the report concludes that pricing power in several industries could suffer if AI has a deflationary impact on products and prices. Certain industries are accustomed to technological disruption, but for others, AI will be more challenging and companies will need to quickly adapt their business models to remain competitive in the market. Many of these AI-driven changes could also impact sustainable development, as the technology enables society to use resources more efficiently and deliver much-needed products and services to remote and/or underserved communities.
How to invest in the future of AI today
The potential of the artificial intelligence market is enormous. The report estimates that AI value creation could reach nearly $1.2 trillion by 2027 and presents four key considerations for investors to take advantage of this investment opportunity:
Be sufficiently invested. Many investors have gained at least some exposure to AI in recent months. Nevertheless, the sheer pace of growth in the industry means that many investors remain undervalued overall.
Tend to activation level. While there is a risk that fears of overcapacity in the base 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 potential and reasonable valuations.
Mega caps are at the core of the AI story. So far, the largest technology companies have benefited the most from the AI onslaught. A feature, not a flaw, of the new AI investment landscape, as the report assumes the AI market is dominated by an oligopoly of vertically integrated “foundries” and monolithic players along the value chain.
It’s not just about the USA. China’s tech monoliths are still trading at valuations similar to those before ChatGPT’s launch. However, they are also investing heavily in AI. Ultimately, China is expected to develop an AI ecosystem distinct from much of the rest of the world, which should lead to significant monetization potential.