Technological turning points in the past have taught important lessons about how to identify long-term winners from transformative innovation.
The market reaction to generative artificial intelligence (GAI) over the past year implies that investors already know how this revolution will play out. But not so fast. While we may be on the cusp of a dramatic technology paradigm shift, its outcomes are far from obvious and will take time to discern.
For much of 2023, US equity markets were defined by excitement over AI. Returns were concentrated in a very small group of stocks seen to be AI winners. The market appears to be assigning a high probability to the assumption that these companies will be the long-term leaders of the AI revolution with the greatest profitability gains. Wall Street analysts are already projecting how much revenue and profit the incumbents will see from AI. There’s a frenzy of forecasts for how many initial users Microsoft will attract for Copilot, its GAI tool expected in November. Some even predict the end of internet search as we know it.
The Race Is on for the GAI Operating System
We think it’s too early to make such bold predictions—particularly on profitability. Yes, GAI marks a paradigm shift with the potential to deliver massive productivity gains by lowering barriers to entry and stimulating new business models. Yet during technological turning points in the past, investors also learned important lessons about evaluating the true long-term impact of transformational innovation.
Today, the spotlight is on the technology mega-caps. Each wants to build their own unique large language model that will become the future GAI operating system. In aggregate, the spending on AI-dedicated graphics processing units (GPUs) will reach at least $25 billion in 2023 alone. Disruptive innovation creates a window of opportunity for the incumbents to enter each other’s playing field.
Lessons from the iPhone and Internet
But will all the mega-caps be the biggest long-term AI winners? And more importantly, how can investors determine which companies have the right business models to profit in an AI future?