The AI revolution – An introductory guide from a UK stock market perspective

Artificial intelligence (AI) is moving at a phenomenal pace, with companies seeking to be ahead of the curve, and its impacts will ultimately spread across the broader economy. In this note, we take a look at the topic from a UK stock market perspective.

 
AI is not new, with its history traceable back to the 1950s. However, the AI phenomenon took off in late 2022, following the commercial launch of ChatGPT. The emergence of ChatGPT was a result of the combination of large language models (LLMs) with the enormous computing power offered by the burgeoning cloud computing providers, supported by a new generation of powerful computer chips.

These new, generative AI solutions enable users to perform a broad range of tasks, including complex problem-solving, writing computer code, or generating/analysing text-based content, at enormously superior levels of productivity.

Most of the hype, to date, has focused on the US Big Tech players, including NVIDIA (which provides the powerful graphics processing units, or GPUs, used by the data centres to process data), the big cloud providers (that provide the computing power to analyse/train large data sets), and the generative AI front runners, several of which are linked to the Big Tech players.

In this note, we have identified a selection of UK technology companies that have already established AI operations, which, we believe, are significant to their investment cases. Also, we examine which UK-listed companies may be best prepared to benefit from the AI revolution.

We believe that investors should raise their awareness and understanding of AI, as it could well be a primary source of growth in global stock markets for the foreseeable future. However, as with all rapidly developing industries, there are uncertainties and, potentially, substantial risks.

Consequently, while this report seeks to identify a number of relevant companies, many of which are still very small, it should not, in any respect, be interpreted as offering investment advice.
 

What strategies should investors consider?

 
We list the five following potential investment strategies:
 

► Investing in the established, albeit highly rated, US Big Tech companies that control the cloud computing infrastructure or provide the hardware.

► Most AI-focused businesses are small-cap companies or micro-caps, and investors could add these stocks to a broader portfolio to diversify risk. We note that the AI small- and micro-cap space is likely to be a highly risky area, with some potentially huge successes, but many failures. These smaller companies may also require several rounds of funding, which could prove difficult. Hence, a prudent approach for small-cap investing would be to add a selection of AI stocks to a broad portfolio, anticipating failures, but hoping for one big winner.

► Identifying existing companies or industries that could benefit from AI, such as technology services businesses, which could take advantage from implementing AI transformation projects. We note that Accenture, the global consulting firm, is investing $3bn in its data and AI practice, to strengthen its AI capabilities, over the next three years. We believe that other professional services firms are likely to take similar steps.

► Buying shares in investment companies that have a significant exposure to AI2.

► Underweighting stocks or industries that could be most disrupted by the AI revolution
 
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