The era of AI – Episode 3 | UBS Trending Special Report

Introduction

The era of artificial intelligence (AI) is reminiscent of the groundbreaking advancements seen in the movie Avatar, creating a new world of opportunities. From species to tools to language models, AI is emerging as one of the most profound innovations and represents one of the largest investment opportunities in human history since the rise of the internet. In the equity market, growth driven by innovation is the strongest influencer of returns. To explore where we head next in the evolution of AI, we invite Kevin Denine, Equity Strategist at UBS Technology and Communication Services, to offer his insights.

Understanding the AI Landscape

The discussion around AI often includes a confusing array of terms such as neural networks, generative AI, AI agents, GPUs, HBMs, LMMs, and more. Kevin Denine clarifies this by breaking down AI into three distinct layers:

Enabling Layer: This foundational level provides the necessary computing power and encompasses elements such as GPUs, data storage, data networking, and cooling equipment for data centers.
Intelligence Layer: At this level reside the large language models (LLMs) and small language models (SMLs) that contribute to the intelligence of AI applications, such as ChatGPT and others.
Application Layer: This topmost layer is where users interact with AI through various applications, showcasing AI's practical uses in daily life.

Market Opportunity

According to Denine, the opportunity in AI is projected to reach around $ 1.1 trillion by 2027. He estimates the breakdown of this market to be:

Enabling Layer: Approximately 45% of revenue, driven by investments in chips and data centers.
Intelligence Layer: About 20%.
Application Layer: Roughly 35%.

The surge in investment primarily comes from the recent advancements in generative AI and large language models, exhibiting a significant inflection point in the market.

Strategic Positioning for Investors

For investors, the recommendation is clear: focus on the enabling layer in the near to intermediate term as it offers robust growth prospects. While it is crucial to prioritize this layer, exposure to the intelligence and application layers should not be overlooked.

Broader Market Effects of AI

Beyond technology, AI's influence permeates various sectors, reshaping strategies for the S&P 500 as well. While the technology sector, particularly semiconductors and cloud providers, is central, it’s essential to recognize the contributions of other industries such as utilities and industrials. For instance, generating a query on ChatGPT consumes significantly more electricity than a Google search, indicating increasing demands on energy and infrastructure as AI evolves.

Real-World Applications and Monetization

Denine highlights several real-world applications of AI that illustrate how companies are currently monetizing these technologies. Examples include:

Customer Service: Companies like Telecom Italia have reported a 20% productivity increase in customer service roles due to generative AI tools.
Retail: Walmart utilized generative AI to rewrite their online catalog, achieving efficiency at 1/100th the manpower required for manual updates.
Media: Warner Brothers adopted generative AI for captioning, realizing a 50% reduction in turnaround time for international content accessibility.

While these advances focus heavily on cost management and productivity improvements, they pave the way for future profit gains.

Conclusion

The discussion reinforces that AI presents a substantial investment opportunity, particularly in the enabling layer, incorporating semiconductors, certain industrials, and power suppliers. However, attention to the intelligence and application layers is equally vital. For continued insights on AI investments, listeners can visit the UBS AI Hub.

Keywords

Artificial Intelligence
Investment Opportunity
AI Layers
Enabling Layer
Intelligence Layer
Application Layer
Market Opportunity
S&P 500
Generative AI
Productivity Gains

FAQ

Q: What are the three layers of AI as discussed in the report?
A: The three layers of AI are the Enabling Layer (computing power), Intelligence Layer (large and small language models), and Application Layer (user interactions with AI).

Q: What percentage of the projected $ 1.1 trillion market opportunity will the enabling layer represent?
A: The enabling layer is expected to account for approximately 45% of the projected market opportunity.

Q: Why is there significant investment in the enabling layer?
A: The investment is largely driven by recent advancements in generative AI and large language models, marking an inflection point in the market.

Q: How is AI currently being monetized by companies?
A: Companies are leveraging AI to enhance productivity and reduce costs, resulting in significant gains across customer service, retail, and media sectors.

Q: Should investors only focus on the technology sector for AI investments?
A: No, while the technology sector is crucial, investors should also consider opportunities in other sectors, such as industrials and utilities, to capture the broader effects of AI.