Could Generative AI be the next investment goldmine?

The AI craze continues to take the market by storm, with investors showing unprecedented interest in the technology since ChatGPT’s debut a mere eight months ago.

It’s easy to see why the market has become so excited.

The AI sector is expected to grow by 42% p.a. over the next decade, with the initial surge coming from businesses providing the necessary infrastructure to train AI systems, followed by applications and devices that use AI.

By 2032, Bloomberg estimates the market for generative AI will reach a massive US$1.3 trillion thanks to tools like ChatGPT and Google's Bard.

So far, Amazon, Alphabet, Nvidia, and Microsoft are among the biggest winners of the AI boom. Chip maker Nvidia, the poster child of AI, is up nearly 200% this year, while Microsoft is up almost 50%.

Morgan Stanley estimates AI-driven gains could put Microsoft on par with Apple with a US$3 trillion market cap, thanks to its strong foothold within the software market.

Until now, the AI investment story has been mainly about these large cap tech wizards within the semiconductors, software, networking and cloud sectors.

But as the space matures, the generative AI application market is where the real action is going to happen.

Looking beyond big tech

As investors are actively seeking ways to gain exposure to the AI theme, AI applications could be the next big thing they focus on in AI's value chain.

Generative AI has already captured investors' attention across the board, with significant price movements seen in both large and small-cap tech stocks.

While large tech stocks have outperformed the broader market, many smaller cap stocks in the space have also risen by 200%+ year-to-date.

For example, enterprise AI software provider C3.ai has gained 230% so far this year. SoundHound AI, a leader in voice artificial intelligence, and security firm Guardforce AI have also more than doubled, while AI-powered analytics services provider BigBear.ai has jumped more than 200% year-to-date.

From AI enablers to AI applications

McKinsey predicts that the AI application market will be the fastest-growing segment of the AI value chain, creating significant opportunities for both established tech companies and new players.

It is set to revolutionise every industry, with a particularly significant impact expected within the banking, high-tech, and life sciences sectors.

In banking alone, the technology could add an extra US$200-340 billion annually to the sector’s top-line if fully implemented.

Retail and consumer packaged goods sectors could see a noteworthy impact as well with a potential value add of US$400-600 billion p.a.

Already, generative AI wars are heating up in the marketing, tech and software worlds.

For example, Salesforce has introduced Einstein GPT for personalised marketing content, while Adobe has unveiled AI services for creatives, including Firefly for image and text effects.

The first wave of generative AI applications

According to McKinsey, the majority of the generative AI use cases will be concentrated in four critical areas:

Information technology:

Generative AI tools like GitHub Copilot, Amazon CodeWhisperer, ChatGPt and Bard can help programmers write code and automate mundane tasks. These automated coders have already upped developer productivity by more than 50 per cent, accelerating the software development process.

For example, AI-powered low-code tools from Snowflake, Databricks, and DataRobot are helping business units create AI applications more easily amid a shortage of software engineers.

Marketing:

Generative AI has already affected core marketing functions such as content and insight generation. It is automating a lot of marketing functions including email marketing, social media marketing, and search engine marketing. For example, it is estimated that generative AI systems will assist in the development of 30% of all outbound marketing messages within two years.

Customer service:

Generative AI-powered chatbots and virtual assistants are transforming the landscape of customer service as they automate mundane tasks, allowing human agents to focus on more complex issues.

The widespread adoption of Generative AI in customer service across industries like retail, healthcare, finance, and telecommunications is projected to generate US$2.1 billion by 2032, according to MarketReserach. Companies like Ada and Dialpad are already making waves in this field.

Product development:

Generative AI is also revolutionising product design, particularly in life sciences. Using generative AI, life sciences companies can speed up the drug design phase from months to weeks. Companies like Exscientia in Oxford and Absci in Vancouver are at the forefront of the space.

Keep a close eye on the Generative AI sweet spots

AI is here to stay as an investment theme.

In the near future, a number of industries are in a sweet spot to benefit from generative AI with more companies deploying it to gain a competitive advantage

Whilst recent share price moves are extreme, investors are likely to be well-served by ensuring their portfolios are positioned to benefit from AI-driven tailwinds over the long term.

Disclaimer: This article is prepared by Ankita Rai. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.