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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June 2023 / ASSET ALLOCATION VIEWPOINT
Dominic Rizzo is the portfolio manager of the Global Technology Equity Strategy. He is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price International Ltd.