AllianceBernstein’s Lei Qiu: AI heralds a technology paradigm shift—but not so fast

While we may be on the cusp of a paradigm shift, its outcomes are far from obvious and will take time to discern.

For much of 2023, US equity markets were defined by excitement over AI and growth from the ‘magnificent seven’.

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Wall Street analysts are already projecting how much revenue and profit the incumbents will see from AI, on the assumption that these companies will be the long-term leaders of the AI revolution with the greatest profitability gains. 

The GAI operating system race

But it is too early to make such bold predictions—particularly on profitability. While GAI marks a paradigm shift with its potential to deliver massive productivity gains, previous technological moments have taught us important lessons about evaluating the true long-term impact of innovation. 

Today, the spotlight is on the technology mega-caps. Each wants to build its own large language model that will become the future GAI operating system.

In aggregate, spending on AI-dedicated graphics processing units (GPUs) will reach at least $25bn in 2023 alone. Disruptive innovation creates an opportunity for the incumbents to enter each other’s playing field.

Lessons from the iPhone and internet

But will the mega-caps be the long-term AI winners? More importantly, how can investors determine which companies have the right business models to profit in an AI future? Here, history can help.

GAI, which took the world by storm in November 2022 with ChatGPT, has been dubbed an ‘iPhone moment’ for innovation. But when the iPhone launched in 2007, the long-term winners were not immediately apparent. 

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In fact, the largest companies by market cap and operating profit were very different in 2007 than they are today, as new business models emerged over time with much larger profit pools. 

While some, like Apple, may have been more obvious, the smartphone spawned a whole new mobile ecosystem. Only then did household names including Meta, Spotify, YouTube and Venmo really begin taking off. We have yet to see this happen for AI.

Capital intensity needed for AI infrastructure

In the mobile internet era, investors valued capital-light businesses that supported the tech giants’ profitability. Now, GAI’s GPU intensive infrastructure requires massive investment in data centres and power systems.

This could shake up the investing calculus for future profits—particularly when capital is scarce and expensive.

To produce a single unit of output in an AI-focused data centre, thousands of GPUs connect as one, akin to production lines at Tesla gigafactories.

At this infrastructure build-out stage of the AI revolution, innovation has shifted from customer-facing industries to capital-intensive manufacturing and development. 

But these are early days, and big spending does not necessarily guarantee big profits. At the dawn of the internet, telcos poured billions of dollars into web infrastructure but the emerging tech titans rode the rails by creating business models that captured most of the upside.

Market landscape is poised to change

The mix of winners in the mobile internet era provides a classic example of how a technology paradigm shift can change the market. While some of today’s mega-caps may consolidate their positions through AI, new leaders will likely emerge and the largest benchmark names will change over time. 

Finding future leaders is not easy. Investors often look at what has worked in the past, overlooking the transformational potential of innovators.

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Take Amazon.com, which was initially seen as an expensive bookseller that evolved into an e-tailer, but has since transformed itself into a logistics provider for vast commercial networks with a cloud-based infrastructure – surpassing the market cap of all US retailers combined. 

Disruption will also destabilise some companies. If GAI is as powerful as we expect, new business models will emerge, challenging the incumbents’ status quo. However, we are not there yet.

Identifying innovation requires imagination and patience

Innovation is about the power of imagination. Instead of rushing to the presumed winners at this early stage, investors must be patient and open minded.

Focusing on near-term profitability may be misleading. Investors should conduct prudent analysis of returns on capital and develop an informed outlook on future returns.

In other words, companies should not be penalised for spending on AI to create growth opportunities, nor should they be rewarded on their level of capital spending alone.

Companies must be scrutinised to ensure their current competitive moats are not threatened by AI.

AI winners might not be the first companies to monetise the new technology. If GAI knocks down entry barriers in different industries, new players will emerge.

Long-term active investors should search beyond the tech giants to pinpoint companies with truly distinctive business models and advantages that are poised to benefit from AI disruption.

Lei Qiu is portfolio manager of international technology portfolio and disruptive innovation equities at AllianceBernstein