AI-driven stock market returns have been concentrated in the hands of a few companies, not least the US market's 'Magnificent Seven'.
However, the only reason why their valuations have expanded so much is because artificial intelligence (AI) is believed to be a truly revolutionary technology comparable to the steam engine or the internet. In economic terms, these are referred to as ‘general purpose technologies’ because they can improve productivity across all industries. So far, it seems that the majority of companies are taking an interest. A recent survey by Morgan Stanley found that 68 per cent of chief information officers are allocating some of their budget to the new technology.
The broad view, echoed by Morgan Stanley's 'Leveraging AI to Drive Efficiency' report, is that it will be the services sector that sees the most operational efficiencies, including software services, financial services and media companies. The analysts see this playing out in three stages. First, companies will use chatbots to speed up data retrieval, similar to a search engine. Second, they will build custom applications with access to their own data, which could for example improve and automate customer Q&As. Finally, they will build custom models that can take action on command.
We are not yet past stage one, and this early in any technological evolution it is hard to make accurate predictions. That hasn’t stopped Morgan Stanley trying.
The analysts looked at a number of studies analysing productivity impacts. They include a National Bureau of Economic Research study that showed 14 per cent gains in customer support, and another from MIT that showed a 40 per cent time saving in writing tasks. A further study from Harvard Business School of 750 Boston Consulting Group consultants showed those who used AI completed 12 per cent more tasks on average, and at a rate that was 25 per cent faster.
Morgan Stanley then picked out companies where research and development (R&D) was a relatively high percentage of revenue. The methodology produced an array of companies across different industries. There was accounting software company Intuit (US:INTU), which is using AI to lower the cost of customer service. There is also website-building platform Wix.com (US:WIX). The company is spending 23 per cent of its revenue on R&D, and has launched an internal AI platform to help its product team.
Then there is Tinder owner Match Group (US:MTCH), which is integrating AI to speed up the development cycle of new products. Even retailer Walmart (US:WMT) is being cited as a beneficiary due to the huge amount of customer data it holds. It could "anticipate or even auto-order items for consumers through AI-enabled agents", said Morgan Stanley analyst Simeon Gutman.
AI might prove to be a catalyst for these companies. However, what is more important in this report is how wide-ranging the companies picked out by Morgan Stanley were. If AI is going to work, it is going to have to work for most companies and not just a few.
What is clear, is that for Nvidia (US:NVDA) to justify its 250 per cent share price gain in the past year, this technology is going to have to start proliferating throughout society. For now, investors are scrambling to look for “AI winners”, but in the long run it should be the whole stock market that gains.
