The seemingly overnight emergence of artificial intelligence (AI) at the end of 2022 into the wider public consciousness has been a long time coming.
While the technology has roots stretching back to Dartmouth University in 1956, it was the creation of the transformer model by Google in 2017 that unlocked its potential and paved the way to the recent creation of generative AI tools such as ChatGPT, Midjourney and DALL-E 2 that have captured the public’s imagination. Corporate interest, experimentation and adoption has been at least as great, if not greater than public interest. The underlying technology is triggering a profound wave of innovation which we believe will create huge, completely new markets.
Generative AI is a new class of technology that has dramatically improved the ability to identify structures and relationships in data to generate new and original content. The underlying large language models (LLMs) are trained on huge datasets in a process that facilitates extremely accurate prediction, resulting in the generation of content that can appear uncanny in its understanding and relevance.
While public tools have leant heavily towards text, image and other media creation, business usage has expanded into coding, biological sciences and other, less obvious areas of analysis. New use cases are emerging daily with huge research intensity and spend testing the limits of the technology.
Market creation through rapid disruption
Our experience investing in disruptive technology tells us that pairing breakthroughs in the underlying technology and the user interface can lead to the creation of massive markets that have never existed before. In recent history, the creation of the PC triggered multiple waves of innovation, but it was only with the Windows operating system that it became accessible to the general population. Likewise, the true value of the internet was realised by the creation of the web browser, which later lead to markets like the $570bn e-commerce or $750bn online advertising markets. Similarly, smartphones really came to prominence and wider adoption with the advent of the iPhone, from which the $6trn app economy evolved.
We also know that the rate of technology diffusion is increasing. The time from the emergence of a technology to its widespread adoption is reducing with each major wave of technological innovation, and indications are that this is true for generative AI too. The desktop internet took around 12 years from inception to reach 50% adoption; smartphones took about half this time to reach the same point, bringing the mobile internet to consumers which allowed Instagram to reach one million users in two and a half months from launch in 2010. ChatGPT reached the same number of users from launch in five days.
The reason for these analogies is our belief that the pairing of transformer models and LLMs with a simple to use, natural language interface is likely to prove the tipping point for AI, and generative AI in particular, where adoption can bloom well beyond the previous, more niche use cases. That 60% of workers are employed in occupations that did not exist in 1940 shows the power of technological innovation to create both physical and digital markets, and we expect that generative AI will again lead to the creation of enormous new markets, many of which might not yet be visible.
Investing in the AI opportunity
The Polar Capital Artificial Intelligence strategy invests in all sectors and companies where we see an
opportunity to benefit from AI. This includes the enablers, those that reside within the technology sector and contribute to the advancement and infrastructure of this technology as well as, importantly, beneficiaries of the technology that reside in the wider AI ecosystem. Such companies might own proprietary data that is now of higher value with the improved analytical capabilities AI brings.
We also look for companies deploying AI tools to generate incremental revenue or profit that is not captured in current expectations, which also brings the potential to see their multiples rerate higher. Finally, we are also excited about companies that will use generative AI to create those entirely new markets and applications that could completely upend existing profit pools.
During the initial stages of an innovation wave, we would expect, and are seeing, capital spending on infrastructure. However, we believe the longer-term opportunity will be much larger in the applications and beneficiaries, within and beyond the technology sector. We are hugely excited about AI adoption and potential in the industrial, robotics, healthcare and information services industries, all of which are already experimenting with and deploying AI tools. It is our firm belief that investing in the face of such rapid disruption requires a technology-minded framework to identify and avoid threats to incumbency, and that domain expertise will be required to capture what we believe will prove a huge opportunity for investors.
Xuesong Zhao is the lead manager of the Polar Capital Artificial Intelligence Strategy
