The investment opportunity in artificial intelligence (AI) may appear to be carried by a small group of mega-cap stocks. Yet there is a great deal of activity bubbling below the popular radar, a reality that is abundantly clear to Tony Kim, head of the Fundamental Equities Global Technology team.
He and 36 BlackRock colleagues traveled 300 miles over five days in June to meet with leaders of 29 public and private technology companies in San Francisco and Silicon Valley. The “tech tour” ― the 11th annual and counting ― is a critical input to the team’s fundamental research process. Mr. Kim recently joined The Bid podcast to share his learnings and reflections from the road.
An AI ‘takeover’
AI is not only dominating stock market returns, but the entirety of Silicon Valley as well. Mr. Kim observes that talk of AI was light and company-specific in the first nine years of the tech tour but has dominated in the past two.
“In the prior nine years, AI was more a tool ― something in the background. Operationally a few companies were using it,” he explains. “It is now at the forefront of every company, and it's really changing the foundations of the software industry and the semiconductor industry. It’s cascading to the power and energy industry. It’s also changing the very product and services that all tech companies are building to. That’s the sea change, and it’s been remarkable how that’s changed in 24 months.”
The making of a new ‘stack’
This takeover naturally alters the investment opportunity set. Mr. Kim describes how AI has redefined the technology “stack,” the hardware, software and data that come together to perform specific tasks or functions. The stack builds from the bottom up and includes three broad layers:
- Infrastructure. Sitting at the base of the stack, these are the chips and cloud infrastructure that form the foundation of AI enablement. The vast majority of investment to date has been centered here.
- Intelligence. This middle layer encompasses the data and AI models themselves. These are being built now and increasing in capability.
- Applications. The top layer includes the software services and solutions that leverage the aforementioned AI intelligence ― creating a new set of AI-enabled applications.
“In 2023 and 2024, much of the investment and stock price reaction has been at the bottom layer of the stack,” Mr. Kim explains. “As we progress into year three, year four and year five, we will start seeing opportunities in that intelligence layer and, of course, finally in the application layer, which has not been a beneficiary of this first wave of AI.”
What end markets will benefit from the big AI build? Mr. Kim cites the consumer market, manifesting as “personal assistants” in areas such as web search, social, e-commerce and shopping. He then expects AI to become more relevant and engrained in corporations, followed by physical “real world” markets such as cars, airplanes, the military and robots.
Each of these is in very early stages of adoption, Mr. Kim says, but all leverage the same infrastructure that is being heavily invested in right now.
The great spending debate
And that investment is big. In their second-quarter earnings reports, the four largest hyperscalers in the U.S. noted aggregate capex spending intentions of over $200 billion for 2024 (50% higher than 2023) ― and growing.
Some observers have recently questioned whether that spending will deliver sufficient return on investment. This concern contributed to a summer pullback in AI stocks. Mr. Kim is undeterred and sees the debate as a matter of short- versus long-term expectations.
Estimates of AI impact may be too optimistic on a two-year horizon, so aligning investment dollars in and profit out in the near term is a “mismatch,” he says. But the potential benefits and returns that could arise in a 10-year timeframe are likely underestimated.
And if the hyperscalers fail to invest now, they put themselves at a competitive disadvantage, which Mr. Kim says would not only affect their future prospects but also their current core businesses, which were constructed in and for a pre-AI era.
A word to the skeptics
As an “AI optimist,” Mr. Kim encourages equal doses of realism and imagination for the skeptics:
Don’t expect investment to perfectly match return “right now today. You're not going to get it; it's just not matched.”
But, he says, “you can't just assume that the current status quo will be sustained.” Visualizing the vast prospects and potential outcomes that AI can have for businesses, society and productivity requires “some leap of faith, some imagination, some creativity of thinking.”
Those who fail to invest in these could find themselves left behind.
Investing involves risk, including possible loss of principal. Investment in a specific sector can entail greater volatility given the narrower focus of the investment universe and concentration in sector-specific risks. Technology companies may be subject to severe competition and product obsolescence.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of September 2024 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results.
You should consider the investment objectives, risks, charges and expenses of any BlackRock mutual fund carefully before investing. The prospectus and, if available, the summary prospectus contain this and other information about the fund and are available, along with information on other BlackRock funds, by calling 800-882-0052 or from your financial professional. The prospectus should be read carefully before investing.
Prepared by BlackRock Investments, LLC, member FINRA.
© 2024 BlackRock, Inc. or its affiliates. All rights reserved. BLACKROCK is a trademark of BlackRock, Inc., or its affiliates. All other marks are the property of their respective owners.
USRRMH0924U/S-3870046
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
© BlackRock
Read more commentaries by BlackRock
