The importance of intelligent investing: why AI-enablers are the place to be
In what has felt like the blink of an eye, AI has become a driving market force that transcends the tech sector, prompting companies across verticals to articulate how it fits into their growth strategies.
The technology is still in the early innings of delivering on its promises. While mentions of AI on earnings calls are at an all-time high, most companies have yet to identify and articulate how AI can continue to drive revenue and profit growth.
The companies seeking to claim first mover advantage in AI applications and infrastructure are investing heavily. As Alphabet CEO Sundar Pichai said on the company’s most recent earnings call, in these early stages of a transformative sector, “the risk of underinvesting is dramatically higher than overinvesting. Not investing to be in the front here has a much more significant downside.”
Investing across the AI spectrum
AI may be a new technology, but it requires the same bedrock approach to risk-adjusted investing by diversifying your portfolio across the value chain. From infrastructure to software and AI applications, it’s important to look at both “AI-enablers” and the “AI-adopters.”
AI-adopters need no explanation. We’ve all heard and followed the storylines of high-flying companies like OpenAI, Anthropic, Mistral AI, Databricks – companies deploying AI to create what will become ground-breaking advancements in how we interact with the world in the future.
AI-enablers are just as important to the ecosystem. While they’re not as well-known as AI-adopters, they lay the critical groundwork to run any AI application and software – and they can range from data centres, cloud providers, data and analytics partners, and chipmakers.
The two sides of AI are of course interconnected; as the appetite for AI capabilities continues to grow, so does that for the right infrastructure needed to power them. The demand for purpose-built data centres and cloud compute capacity capable of running intensive AI workloads, in particular, is growing exponentially.
Looking beyond the headlines to AI-enablers
AI-adopters have historically grabbed all the headlines. It’s easy to see why – they tend to be the companies with flashiest products and services that feel the most tangible as the everyday person wrap our heads around how AI can transform our lives.
Similar to how conversations about electric vehicles far overshadow those about the charging network needed to support them, AI-enablers are seen as the “picks and shovels” of the industry. They may not be the companies whose commercials you see most often, and they may not have the most beautiful consumer interface; but without them, the dream of an AI-powered world stays just that – a dream.
AI-enablers are an attractive proposition for strategically minded investors, as we are now starting to understand that the computing power required to train these models is simply astronomical. Mark Zuckerberg conceded that Meta’s next large language model would require 10x the computing power than its predecessor. Studies have already begun to raise the alarm bells that there is not enough computing infrastructure to meet the AI-driven demand. Private equity investors have already recognised this market need; Investors from KKR & Co to Brookfield Infrastructure Partners, and Blackstone committed $43bn to US data centre deals between 2021 and 2023. Most recently, Blackstone stated that its data centre pipeline has reached $70bn on its own.
The large tech players are also building their own infrastructure in many cases, but even that won’t be enough to meet their needs. Microsoft, Alphabet, Amazon and Meta have collectively announced $106bn in capital spend in the first six months of 2024, and they are forecasting that AI investments could more than double by year-end. Within the next 5 years, much as $2tn is expected to be deployed into AI infrastructure and data centres globally – half of that in the US, and half of that spread across the rest of the world.
Looking ahead
Intelligent investing in the age of AI is no small feat, especially when there are so many strong brands under the spotlight. But focusing on AI-enablers will be important for investors in coming years. When Thomas Edison patented the light bulb in 1880, it was a revolutionary invention that took decades to make commercially viable. It was not until the electric grid was built out over the following decades, that the light bulb was able to realise the full extent of its potential.
Today, while the headlines will continue to focus on the AI-adopters who present an exciting vision to transform entire industries or ways of life, we would be remiss not to put in a good word for AI-enablers, who are quietly working to build the basic utilities required to usher in this new chapter of revolutionary innovation.