By Nicholas Jasinski
It's time for a new batch of AI winners. Artificial intelligence has been front and center for investors for more than a year, with companies building hardware and software for this new cycle of innovation enjoying stellar stock returns. The next beneficiaries: nontech companies using AI tools to become more efficient and productive.
It isn't just the Nvidias and Microsofts of the world talking about AI these days. Mentions of the term on U.S. large- and mid-cap company earnings calls are up some 75% so far this year, compared with the same period last year, according to a search of transcripts on AlphaSense. Those firms hailed from 44 industries, including media, retail, banking, aerospace, and oil and gas.
Sure, talk is cheap, and these days most AI mentions are either anecdotal or aspirational -- with little impact on earnings. But as with every transformative technology, AI will, over time, be adopted by a much wider universe of companies.
The inventors and manufacturers of early steam engines weren't the only beneficiaries of that technology; factory, railroad, and ship operators quickly used it to power their businesses and machinery. Ditto for later technologies like electricity, telephones, computers, and the internet. The rewards from each new innovation eventually shifted from enablers, who created and commercialized it, to adopters, who implemented it.
In the AI era, the enablers are the companies focused on building the software models -- firms like OpenAI, Microsoft, Alphabet's Google, and a litany of others. The enablers are also the designers and manufacturers of cutting-edge hardware used in the data centers powering AI -- think Nvidia, Advanced Micro Devices, Super Micro Computer, and Taiwan Semiconductor Manufacturing -- and the cloud-computing giants that operate the infrastructure, like Amazon.com, Microsoft, and Oracle.
The enablers' AI potential and early successes are no secret to investors: Shares of Microsoft, Alphabet, and Amazon are up 70% or more since the start of last year; Nvidia's have surged 465%. A group of enabler stocks with material AI businesses assembled by Morgan Stanley strategists returned an average of 111% in 2023, versus a mere 6% return by a collection of adopter stocks.
A late-2023 Morgan Stanley survey of chief investment officers found that a plurality expected their firms' first AI-enabled projects to be up and running in the second half of 2024. Enablers' fate is inherently linked to adopters, which are their ultimate customers, after all.
That dynamic won't flip overnight, but adopters able to demonstrate progress on AI initiatives will increasingly get credit from investors in the form of higher earnings multiples, says Edward Stanley, Morgan Stanley's head of thematic research in Europe. Those multiples will be justified by wider profit margins and faster earnings growth.
"AI is benefiting companies at different rates," says Patrick Kelly, a portfolio manager at growth-oriented investment shop Alger. "Some are already seeing big benefits -- some will see it play out over the next several years."
The earliest wave of AI adoption is already visible in a variety of internet businesses across social media, entertainment, and gaming. Take Meta Platforms, which has rolled out a flurry of consumer- and advertiser-facing AI tools in recent months. Facebook, Instagram, and WhatsApp users can access Meta's AI chatbot directly in the apps, which may increase engagement, the company says. But the real benefit to Meta comes from behind-the-scenes advances to its ad-targeting models, which analyze vast amounts of data to present paid content to interested users.
An AI-powered boost is also appearing at other players in digital advertising, such as Trade Desk and AppLovin, says Kelly, who manages the newly launched Alger AI Enablers & Adopters mutual fund and exchange-traded fund. Online sports-betting firm DraftKings is another early AI adopter, using the technology to set odds for individual bets and ever-more-complex multiple bets within single games.
AI is increasingly augmenting and replacing rote customer-service tasks -- a win-win for companies and consumers. Buy-now-pay-later provider Klarna said in late February that its customer-service chatbot, powered by OpenAI's models, had 2.3 million conversations in the previous month -- doing the work of 700 full-time agents with greater accuracy and cutting the average time to resolution from 11 to two minutes. The privately held company estimates that employing the AI assistant will save $40 million a year.
Other industries will take longer to realize the impact of AI, but the productivity boost is coming. Financial-services firms are automating more back-office compliance functions, as well as complex underwriting processes, despite the regulated industry's aversion to risk. JPMorgan Chase has a $15 billion annual technology investment budget, 2,000 AI and machine-learning experts on staff, and a newly created position of chief data & analytics officer reporting to CEO Jamie Dimon.
"We have been actively using predictive AI and ML for years -- and now have over 400 use cases in production in areas such as marketing, fraud, and risk -- and they are increasingly driving real business value across our businesses and functions," wrote Dimon in his annual letter earlier this month.
There's similar efficiency-boosting potential in healthcare. Insurer UnitedHealth Group is starting to use AI in everything from streamlining administrative functions like processing claims to providing medical insights based on its massive database of prescription and medical records.
Retailer Walmart has a generative AI search in its app -- type in "Help me plan a birthday party," for example, rather than separately shopping for balloons, candles, and other supplies. It's also employing AI to optimize inventory for anticipated demand based on Walmart's tremendous amount of data on consumers.
AI is finding its way into nuts-and-bolts businesses, from the factory floor to the oilfield. Baker Hughes has a partnership with C3.ai, using AI analytics to boost productivity of existing oil-and-gas wells, drill more efficiently, and better predict maintenance needs.
Give them a little more time and the adopters could soon start shining like the enablers.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 26, 2024 02:30 ET (06:30 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments