Artificial Intelligence continues to be the investment theme on everybody’s lips. Here, Colin MacKenzie, Director, Investment Management at Arbuthnot Latham & Co., Limited, offers a breakdown of key AI trends all investors should know about.
We are increasingly hearing from clients wanting to know more about artificial intelligence (AI). Specifically, what is fuelling markets latest tech darlings such as Nvidia, a graphics processing units (GPUs) designer – who briefly – catapulted to the world’s most valuable listed company with a market capitalisation of more than $3 trillion. Whilst recent market volatility has helped remove some excess exuberance, is this merely an air pocket or something more sinister? Below is our AI 101 from an investing perspective.
The rise of AI and the semiconductor industry: A symbiotic growth
In recent years, the symbiotic relationship between AI and the semiconductor industry has become increasingly apparent.
This partnership is not just a matter of technological advancement but a fundamental driver of economic growth and industrial innovation. As AI continues to scale, its demands on computational power and efficiency push the semiconductor industry to new heights, fostering a cycle of mutual enhancement.
As AI continues to scale, its demands on computational power and efficiency push the semiconductor industry to new heights, fostering a cycle of mutual enhancement.
The AI set-up: Why scaling AI is important
Scaling AI involves expanding computational resources, data, and model complexity to enhance the performance and capabilities of AI systems. This expansion is crucial for achieving advanced functionalities. However, the resource demands are staggering. For instance, achieving the computational power equivalent to using 100 million H100 GPUs could require more than 20% of the US’s electricity production and cost around $1 trillion. Despite these daunting figures, industry leaders like Sam Altman, CEO of OpenAI) are actively seeking to raise substantial capital to support this trajectory, highlighting the immense potential and necessity of scaling AI.
Economic justification for AI investment
The economic benefits of AI are already evident. OpenAI’s revenue has doubled every six months, reaching a $2 billion run rate by early 2024. Microsoft also reported significant AI-driven revenue growth.
The economic benefits of AI are already evident. OpenAI’s revenue has doubled every six months, reaching a $2 billion run rate by early 2024. Microsoft also reported significant AI-driven revenue growth
Projections suggest that AI could generate a $100 billion revenue run rate for major tech companies by mid-2026. This potential justifies the substantial investments required to develop AI infrastructure, which could become the largest revenue driver for big tech companies, leading to hundreds of billions in further AI investments.
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Historical precedents for massive AI investment
Investing in AI at unprecedented scales is not without historical precedent. For instance, the Manhattan and Apollo programs each represented about 0.4% of the US GDP at their peak. In the private sector, telecom investments in internet infrastructure from 1996-2001 amounted to around $1 trillion. Comparatively, the projected $1 trillion annual investment in AI by 2027, equivalent to approximately 3% of the US GDP, while massive, fits within the context of past significant capital buildouts.
Generative AI’s impact on productivity and GDP
Generative AI, in particular, has the potential to significantly boost productivity and economic growth. Over a ten-year adoption period, AI could increase US labour productivity by 1.5%. Furthermore, according to Goldman Sachs, generative AI could raise global GDP by 9.3%, or nearly $7 trillion, within a decade. These figures underscore the transformative potential of AI on a global scale.
Generative AI, in particular, has the potential to significantly boost productivity and economic growth. Over a ten-year adoption period, AI could increase US labour productivity by 1.5%
Investment opportunities in AI and semiconductors
The global generative AI market is expected to grow from $40 billion in 2022 to nearly $1.3 trillion by 2032, representing a compound annual growth rate (CAGR) of 42%. This growth necessitates significant investment in AI infrastructure, including semiconductors, data centres, servers, networking equipment, and cloud services. Projections indicate that AI-related investments could reach $500 billion globally by the end of 2025.
The role of semiconductors in AI infrastructure
Market dynamics and key players
The semiconductor market is dominated by a few key players. Companies like TSMC and Samsung control 71% of the foundry market. Nvidia leads the GPU market, essential for AI data centres. The complexity and capital intensity of semiconductor manufacturing create high barriers to entry, resulting in a market dominated by established players with significant technological and financial resources.
The complexity and capital intensity of semiconductor manufacturing create high barriers to entry, resulting in a market dominated by established players with significant technological and financial resources
Future outlook and investment potential
The semiconductor industry is poised for robust growth, driven by the increasing demand for AI applications. Revenue growth turned positive in Q4 2023, with continued improvement expected through 2024 and 2025. Key players like Nvidia, Broadcom, and Marvell are well-positioned to benefit from this trend, particularly with the adoption of custom AI application-specific integrated circuits and the anticipated growth in data centre and cloud infrastructure investments.
In conclusion, the interplay between AI and the semiconductor industry represents a critical driver of technological advancement and economic growth. As AI continues to scale, the demand for advanced semiconductors will only increase, fostering innovation and investment across both sectors. This symbiotic relationship not only propels technological progress but also holds the potential to significantly enhance global productivity and GDP growth, marking a new era of industrial and economic development.
Important information
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.
