ChatGPT has been a recent, positive disruption to the industry, uncovering valuable investment opportunities in AI.
The improvement in AI is different than prior tech investment cycles due to deployment on existing infrastructure. Since AI is effectively a purely digital innovation, it’s going to move at a very fast pace, Brad Slingerlend, co-founder and investor at NZS Capital, said during a webinar for investors on June 21, 2023.
“Think about the commercialization of the internet, cloud software,” Slingerlend said. “We had to build the cloud data centers. We had to build the fiber links put up the cell towers, we had to manufacture the cell phones. AI just runs on all of that.”
First Mover Advantage May Be Huge
The AI space favors the incumbents. Slingerlend said the big companies that control smartphones and the cloud, that have all these existing services, are likely going to continue to capture a large portion of the value from AI.
The way that AI learns reinforces the first mover advantage. “If you have a competitor who starts to leverage this technology, they’re going to get this sort of rolling snowball network effect of data,” Slingerlend said. “You could get behind to such a point where they reach escape velocity, and you don’t. So, it’s just really making sure that whatever investment you’re looking at, that the companies have a strategy for this that they’re talking about it.”
However, the economic impact of AI will be much more extensive than just the immediate beneficiaries. Slingerlend expects AI may be the biggest margin tailwind we’ve ever seen as well, as one of the biggest productivity increases seen in the economy.
Slingerlend pointed to cloud computing as an example. While it’s a big industry for software companies, the companies that use cloud computing are getting multiples of value out of the digital infrastructure that they’re using in terms of transforming their businesses digitally.
Potential Investible Opportunities in AI
Brinton Johns, co-founder, and investor at NZS Capital, said there is an ecosystem of companies that enable us to be at this moment in history where AI is becoming very real and tangible in everyday lives.
“ASML is certainly one of them; perhaps one of the top three most important,” Johns said. “Without getting technical, they basically enable us to stay on Moore’s law. They enable us to identify these semiconductors and allow them to have the computing power like a human brain.”
“There’s only one company in the world that does what they do,” Johns added. “It’s a natural monopoly. Every other company tried to do it and they just tapped out. It was too hard.”
Johns said it is perhaps the most complex human machine ever built. “If they did not exist, the world would get set back a decade,” he added.
The Ecosystem of Investment Opportunities in AI
Brinton Johns, co-founder, and investor at NZS Capital, said there is an ecosystem of companies that enable us to be at this moment in history where AI is becoming very real and tangible in everyday lives.
“ASML is certainly one of them; perhaps one of the top three most important,” Johns said. “Without getting technical, they basically enable us to stay on Moore’s law. They enable us to identify these semiconductors and allow them to have the computing power like a human brain.”
“There’s only one company in the world that does what they do,” Johns added. “It’s a natural monopoly. Every other company tried to do it, and they just tapped out. It was too hard.”
Johns said it is perhaps the most complex human machine ever built. “If they did not exist, the world would get set back a decade,” he added.
How To Put This Into Portfolios
Johns said NZS Capital takes more speculative ideas and sizes them lower in the portfolio. However, semiconductor equipment and manufacturers are deemed fairly safe predictions, whereby they will be relevant no matter the end state with AI.
“So those will be large positions in the portfolio,” Johns said. “Whereas some of these other more speculative ideas that may or may not work are going to be much smaller.”
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Important Information
The views expressed herein are those of speakers at the time the comments were made. These views are subject to change at any time based upon market or other conditions, and the author/s disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions are based on many factors, may not be relied upon as an indication of trading intent. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.
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Harbor Capital Advisors, Inc. is not affiliated with NZS Capital, LLC.
This article was prepared as Harbor Funds paid sponsorship with VettaFI.
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