Webinar Replay

Generative AI: The ultimate tool to unlocking productivity and insights?

July 28 2023

At T. Rowe Price we are big believers in the power of artificial intelligence (AI).  This is potentially the biggest technical innovation since electricity and the silicon innovation behind AI and AI itself will potentially change our lives in unfathomable ways. When it comes to revolutionary technologies – mainframe computer, personal computer, decentralized information technology, the internet, cloud computing and now AI, the market usually gets the direction right but can overestimate or underestimate as speculation is imprecise. Our job as active managers is to navigate this emerging trend responsibly for our clients' portfolios.

The views contained herein are those of the presenters as of the date noted and are subject to change without notice. These views may differ from those of other T. Rowe Price Group companies and/or associates. This material is not intended to be investment advice or a recommendation to take any particular investment action.

Generative Artificial Intelligence (AI) Investing in a Nutshell

  1. Companies providing generative AI and its tools likely are to become mission critical to the success of their corporate customers, while indispensable to individual users.
  2. Generative AI has the potential to be a large secular growth market.
  3. The stock valuations of companies involved in generative AI appear reasonable overall.
  4. Generative AI has the potential to improve a company’s fundamentals, whether that’s revenue acceleration, operating margin expansion, or improved free cash flow conversion.

What It Takes to Win in Generative AI

  • During T. Rowe Price's annual tech trip, the head of research at NVIDIA laid out the reasons for the recent sudden advances in AI technology.

    – The use of powerful graphic processing units in data centers has paired with advances in large language models in a one-two punch that has greatly accelerated AI’s power.
    – Many companies in the semiconductor ecosystem are powering this revolution and stand to benefit.
  • Having both superior data and distribution will allow companies to move quickly and aggressively in this field.
  • Companies with both attributes are generally some of the largest in the world.

How Is Generative AI Likely to Impact Sectors Other Than Tech?

  • Generative AI is likely to bring far-reaching benefits across sectors, in terms of both increased productivity via automation and innovation through making scale manageable.
  • Transformer models can understand and see patterns in complex data sets that are far too big for the human mind to comprehend.
  • For example, in pharmaceuticals, artificial intelligence has seemingly solved the problem of understanding protein folding and protein structure. Understanding that we can better target disease causing proteins or create more effective therapeutics while at the same time dramatically lowering the cost and time of discovery.

Generative AI’s Impact on the Economy

  • Over the medium term, companies are likely to either rapidly advance the buildout of the infrastructure to service artificial intelligence or look to first understand how generative AI might affect their businesses before reducing workforces in a tight labor market.
  • On a longer-term view, however, artificial intelligence is likely to allow the freeing up of resources to go to higher and better use cases, which should provide a tailwind to growth and productivity.
  • This transition may be similar to the multi-decade move in the U.S. manufacturing sector toward an outsource model. Over the short term, capital-intensive businesses moved to low-cost geographies. But U.S. companies focused on asset-light, intellectual property-intensive businesses proved to be dramatically beneficial to the U.S. economy over the long term. The job growth in these areas more than offset the job losses in the manufacturing sector over time.

T. Rowe Price’s Own Use of Generative AI

  • T. Rowe Price established the New York City Technology Development Center (NYC Tech Center) roughly six years ago, where it has been exploring the use of AI in the firm’s business.
  • The NYC Tech Center’s goal is to build capabilities to help our investors by enabling our managers and analysts to get a handle on big data and use it to improve their decision-making.
  • Our strategy centers around what we call “intelligent augmentation” rather than pure artificial intelligence. The goal is not to automate away decision-making, but to provide more information and insights to decision-makers to allow them to be more productive.
  • If we can speed up the consumption of information, its characterization, or even the creation of information, we believe this will ultimately lead to higher productivity at the firm and better outcomes for our clients.

Sorting Generative AI’s Real Potential From the Hype

  • Seeing what a software developer might do in four hours reduced to a couple of minutes is compelling, but generative AI is still immature in many ways.
  • Current generative AI platforms will still “hallucinate” and return bogus information.
  • “Prompt engineering,” or taking a question and manipulating it so it can be interpreted correctly by the generative AI, can be time consuming.
  • At this point, generative AI is still far from being a “magical robot” that can make decisions on our behalf.

Winners Likely to Emerge in the Marketplace

  • Previously, every shift in computational platforms—from mainframes, to personal computers, to mobile, to the cloud, and so on—established new winners in the marketplace.
  • Very large companies with the powerful twin benefits of superior data and distribution may be the companies that come out on top. However, these mega-caps may not see the same returns as they have in recent years, when they were able to scale massively on an asset-light structure.
  • The need to spend heavily to maintain a “moat” in generative AI may result in a different return environment.

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