Talking Heads - L'engouement autour de l'intelligence artificielle (IA) alimente le rebond des actions tech

This is an edited transcript of the audio recording of this Talking heads podcast

Andrew Craig: Hello, and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis through the lens of sustainability on the topics that really matter to investors. In this episode, we’ll be discussing generative artificial intelligence. I’m Andy Craig, co-head of the Investment Insights Centre, and I’m delighted to be joined by Derek Glynn, Associate Portfolio Manager responsible for information technology and communication services in our US equities team in Boston. Welcome, Derek, and thanks for joining me.

Derek Glynn: Hi, Andy, it’s great to be here.

AC: With tech stocks attracting a lot of investor interest recently, what are the key themes in information technology and artificial intelligence you’re focusing on for the second half of 2023 and  longer term?

DG: We could see the growth in expenditure bottom out in the second half of the year for the major cloud providers and potentially reaccelerate in the fourth quarter.

There’s been a longer-term trend of digital transformation where companies are shifting resources and IT workloads to the cloud. It gives them cost efficiencies and the benefits of elasticity, being able to dynamically scale their computing with changes in demand. That growth in cloud spend has been slowing for many quarters now, growing at around 20% year-over-year in the last quarter versus more than 40% five to six years ago.

Companies have seemed cautious on the macroeconomic front over the past year, choosing to optimise their existing workloads instead of starting new ones. But that can only be done for so long and there is a strong pull to digitally transform. So I’m optimistic that growth will trough and then potentially reaccelerate given the scale and importance that the cloud providers have in the tech ecosystem. The long-term growth theme of digital transformation and the shift to the cloud is still intact given that most IT workloads are still on companies’ premises.

Secondly, there’s going to be a continued focus on profitability and margin expansion. With interest rates at 5%, the world’s a lot different than when they were at 0%. Debt and equity capital are more expensive than two years ago, so it’s more challenging to fund growth. As a result, we’ve seen many technology companies strive for profitability if they were previously incurring losses, and those that were already profitable are focused on expanding margins. That is likely to continue as long as interest rates stay at the current levels or higher.

Finally, generative artificial intelligence is emerging as a key focus. It’s an exciting technology that could potentially usher in a new wave of innovation in the economy.

AC: Why is generative artificial intelligence so important potentially?

DG: Generative AI is a technology that can generate content from a text-based prompt. The more technical definition is that it’s a large language model, trained on a vast amount of data. It was designed to predict the next word in a sequence. With more and more data and the right type of training, it’s been able to reach advanced levels of reasoning. A simple proof point is one of the models attaining top decile scores on some difficult tests, like the Uniform Bar Exam or the Biology Olympiad.

This technology is still in its early stages, but there’s already a breadth of use – from writing essays to summarising data or even assisting developers with generating code. It’s also conversational in the sense that queries can tie into previous prompts, so that the dialogue with a chatbot flows in a natural, human-like way.

It’s also evolving into more multi-modal format. Instead of text-based prompts and text output, we’re starting to see this technology move into images, video and audio input and generation. If we were to extend these capabilities out to what it could ultimately look like, imagine a world where we have access to specialised virtual assistants via a smartphone or an augmented reality device.We may have an AI virtual shopping assistant who can recommend clothes based on our sizes, preferences and budget, and then source those clothes from a disparate set of local online merchants.

We may have a virtual health assistant who creates a meal plan and workout routine that’s customised to our schedules and preferences based on data it collects from synching with our wrist monitor.

Or we could have an entertainment assistant that generates customised video clips based on the genre of movies we’re interested in.

There are exciting potential developments ahead.

AC:  Why should investors care about generative artificial intelligence and what are the risks and opportunities?

DG: Generative AI can unlock new growth avenues and help companies become cost efficient. There will be new products and capabilities driven by accelerating innovation, which opens up revenue opportunities.

And there are opportunities to do more with less. Developers can write more code per hour; customer service helpdesks can be AI assisted and handle more questions without the intervention of a human. This can drive cost efficiency.

The businesses that are well positioned to benefit would be those that develop the foundational models themselves, those providing the computing and storage resources to enable AI, and the hardware or semiconductor supply chain. These will see incremental demand.

There are also companies with proprietary data that can find ways to weave this technology into their existing offering to develop new products or improve existing ones to better retain customers.

Imagine you’re on the sales team and you’re responsible for retaining or prospecting hundreds of clients. Your company has just released a new, exciting product. You can use generative AI to draft an email introducing the product to your clients, describing its unique features. The email can be personalised based on the data you have on each client – their size, location, preferred language, the length and quality of the relationship you have with them. This is something the technology would be quite good at doing.

In terms of risks, whenever a new technology emerges and gains rapid adoption, some companies could be disrupted or disintermediated, particularly if they don’t adapt quickly enough. Although this technology holds promise and opportunity, it could also weaken economic moats or at least call into question the durability of some businesses’ growth. Software businesses without a strong value proposition or without proprietary data could face more competition. Content itself may become more commoditised because its generation is almost free and in the hands of consumers who can personalise it. This technology can also be a competitor to online education companies because it is really good at tutoring in certain subjects.

AC: There’s been a lot about generative artificial intelligence in the news. Where do you think investor sentiment is on it? Is it being overhyped?

DG: It’s definitely garnered an explosion of media interest, and from consumers who are trying it out for management teams that are thinking about how this could impact their business, and then also from investors themselves.

Given how early stage it is, it’s going to be a while before it’s truly needle-moving in terms of most companies’ revenues. Companies need to be confident that their own or their customers’ data will be secure, that the AI output is accurate, that there are strong cybersecurity defences, that any bias in the models is minimised or eliminated, and that they’re not violating copyright laws.

Many things still need to be ironed out with the technology, and that could prolong the period before companies ultimately adopt it and realise revenues or other benefits from it.

It does seem overhyped in the short run, and we’ve already seen an expansion in multiples for certain technology stocks exposed to this theme. On the other hand, given how transformational it can be, many are still underestimating its longer-term impact five years or more out.

Ultimately, the technology will impact all of us at some level, just as the Internet and smartphones did, so investors should pay close attention to the development of generative AI.

AC: Derek, thank you very much for your analysis and for joining me today.

This presentation includes a discussion on current market events and is not intended as investment advice or an offer of products or services by BNP Paribas Asset Management. Please keep in mind that the information and analysis in this presentation is only current as of the publication date.