Artificial intelligence certainly made headlines in 2023, but how many companies actually made money from it? ChatGPT and other generative AI tools have directly benefited a small number of stocks so far – particularly the semiconductor firms that make essential chips. However, we believe that could start to change. Here are some of the key factors to watch as this narrow market begins to broaden.
As new technologies are adopted, infrastructure companies have traditionally been the first to benefit – and that matches what we’re seeing today with the generative AI cycle.
Hyperscaler stocks are lagging semiconductors for now. Markets want to see more of an impact on earnings before bidding up share prices.
Despite the enthusiasm from software companies investing in AI, that’s not what’s fueling their stock prices – yet.
Three things to watch as we move through the gen-AI investment cycle
#1: In prior tech cycles, infrastructure was the first to benefit from new technologies, but other parts of the tech stack weren’t far behind.
How have the public markets’ forward discounting mechanism assessed the impact of ChatGPT and other generative AI (gen-AI) technologies? Until now, much of the gains have gone to the infrastructure providers that have shown actual earnings from gen-AI – namely the handful of semiconductor companies whose chips are critical for training large language models (LLMs). This is not unlike past tech market cycles, when the companies that provided the infrastructure for new technologies saw benefits well before other parts of the tech stack. Yet some of the very same chipmakers that have benefited from AI are limited by capacity constraints even amid growing demand for their chips from “hyperscale” cloud platforms. This may bode well for a broader swath of semiconductor firms.
#2. Stock prices for hyperscalers are lagging semiconductors – at least for now. Markets want to see more of an impact on earnings.
Large-scale cloud service providers called “hyperscalers” (shown as platform providers in the accompanying chart) are essential to fulfilling AI’s promise, since they’re the only ones equipped to handle the enormous data requirements. These firms outperformed the broader market in 2023, though a handful of chipmakers did far better. The performance dispersion among gen-AI platform and software players is subtle – mostly reflecting the near-term trajectory of earnings, which are still being driven by legacy revenue sources and overall expense discipline. We believe the market is taking a wait-and-see approach in valuing gen-AI benefits for the cloud platforms. These companies are still ramping up their infrastructure investments, which can dampen earnings growth trajectories in the near term. Many are also launching AI-related products and modules that have yet to demonstrate meaningful earnings contributions. We expect greater clarity on gen-AI’s impact in the coming year.
One year post-ChatGPT launch, gen-AI platform and software providers did well, but lagged infrastructure
Total returns (21/11/2022-21/11/2023; indexed to 100)
Source: FactSet, Voya Investment Management as of November 2023. The Gen-AI composites are equal weighted baskets of companies that were top mentioners of Gen-AI in earnings call transcripts. The composites were created by the Voya Investment Management Global Artificial Intelligence Equity Team. Gen-AI platforms = major hyperscale cloud providers. Gen-AI infrastructure = companies that belong to the semiconductor & semiconductor equipment and technology hardware & equipment industry groups. Gen-AI software = companies in the software & services industry group, excluding the major hyperscale cloud providers. Past performance, or any prediction, projection or forecast, is not indicative of future performance.
#3. The big software companies expanding with AI haven’t (yet) seen a corresponding share price jump.
Since ChatGPT made its public debut in late 2022, several high-profile software companies moved quickly to add LLM and gen-AI capabilities to their products. Not surprisingly, their management teams expressed a great deal of enthusiasm about the opportunities they believe their gen-AI investments will provide. Yet in our view, this technology’s full potential has so far not been fully reflected in earnings expectations or meaningful earnings multiple expansion. Generally speaking, as markets recognise improved long-term growth potential, valuation multiples should increase. But that hasn’t happened yet. From our perspective, the majority of price appreciation for these names in 2023 was due to the increase in forward estimates of operating income. Meanwhile, the average/median valuation multiple remained relatively flat year over year.
The bottom line: Cloud and software companies could be next to benefit from AI investments, but markets likely want to see positive earnings news first
Despite a dynamic year of AI news, it appears that LLM/gen-AI developments have benefitted a small subset of beneficiaries. Semiconductor companies whose chips power these AI models have grown the most. Certain cloud platforms and software companies have also done well, but it seems their recent performance has come from legacy revenue and earnings sources – not enthusiasm for potential benefits of gen-AI. This reinforces why we seek to not only identify key emerging technologies, but which phase of the tech cycle we’re in – and which companies might benefit from each phase. In today’s environment, we believe cloud platform providers and software companies may be the next to reap gains from the gen-AI tech market cycle, but stock prices will likely not reflect that until it’s clear there will be a positive impact on earnings.
Cyber-attacks are good for business – if your business is cyber security
In a world plagued by escalating cyber threats, businesses are forced to prioritize cyber security like never before. Here are some alarming examples of high-profile cyber-attacks in 2023, emphasizing the need for robust security solutions.
Chipmakers rode the first generative AI wave. Who’s next?
Artificial intelligence certainly made headlines in 2023, but how many companies actually made money from it? ChatGPT and other generative AI tools have directly benefited a small number of stocks so far – particularly the semiconductor firms that make essential chips.
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of this document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced, except for the case of explicit permission by Allianz Global Investors. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional /professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors UK Limited, authorised and regulated by the Financial Conduct Authority;in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).