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June 2023 / INVESTMENT INSIGHTS

Generative AI Holds Promise and Peril for Investors

Looking beyond the hype to see opportunities in builders and toolmakers.

Key Insights

  • T. Rowe Price managers and analysts believe that generative artificial intelligence (AI) will reshape the investment landscape.
  • Mega‑cap tech companies are likely to dominate the “foundation models” on which AI rests, but a range of other companies will reshape it—and be reshaped by it in turn.
  • Chipmakers and other “tool” providers may be the primary beneficiaries of a burgeoning AI “arms race.”

People can’t stop talking about artificial intelligence (AI) lately—and many of them are in Silicon Valley’s executive suites. The biggest headline to emerge from our Investment Division’s most recent annual “Tech Tour” visit to Silicon Valley to meet with some of the technology industry’s leading executives was this: AI has reached a tipping point and is poised to transform the market landscape.

A New “Arms Race” in the Technology Sector

Time will tell, but November 30, 2022, might go down as one of the most significant days in the history of technology—perhaps even on par with Steve Jobs’ introduction of the iPhone on June 29, 2007. On that November day, a small San Francisco‑based company, OpenAI, launched ChatGPT, which soon took the world by storm.

What made ChatGPT especially compelling is its use of natural language processing and so‑called generative algorithms. These two branches of AI allow ChatGPT to synthesize information it finds on the web, put it in the context of its current “discussion” with the user, and then reorganize the information to provide an answer. As indicated by its name, generative AI creates new content, rather than just aiding human perception and understanding, as was the case with previous forms of AI.

By some metrics, it was the fastest rollout of any technology in history—within a week, ChatGPT had over 1 million users, OpenAI estimated, while many more were lined up for their chance to access the tool. News reports later suggested that it had gained 100 million users within two months—the fastest any application had reached that threshold. For context, it took Instagram 30 months to do the same.

According to Dom Rizzo, recently appointed as the sole portfolio manager of the Global Technology Equity Strategy, the leading mega‑cap technology companies were taken by surprise by the magnitude of the consumer response to ChatGPT. The result has been what he describes as an “arms race” to acquire new AI capabilities and refine existing ones.

The Key Innovations Behind Generative AI

Our managers have long been following and investing in the basket of important and interrelated innovations that had to come together to build ChatGPT and other “foundation models.” These include cloud computing, new means of efficient communication between computing systems through so‑called application programming interfaces (APIs), and the accumulation of sheer computing power enabled by ever‑faster chips and processors.

Likewise, our managers and analysts suspect that a wide range of companies, both large and small, stand to benefit from the development of AI applications. And in our view, companies of nearly any kind—and their investors—need to pay attention.

In the popular culture, AI is often envisioned as a generalized system that has gathered all of the world’s information together and is capable of anything—whether benign or evil. But a more likely scenario is a small set of massive foundation models resting below thousands of specialized AI user interfaces—designed by perhaps nearly as many companies.

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IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

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202305-2908622
RELATED FUND
SICAV
Class I
ISIN LU1244139827
An actively managed, global, all-cap fund that seeks to invest in companies that can benefit from innovation in technology. We invest in around 30-80 high conviction ideas seeking to identify secular growth themes and companies positioned on the right side of change. The fund is categorised as Article 8 under Sustainable Finance Disclosure Regulation (SFDR).
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