The rapid growth of generative artificial intelligence (AI) has sparked excitement in the markets. However, as the initial euphoria settles, investors are now becoming more aware of the potential risks associated with AI adoption. They are realizing the need for a selective approach to stock-picking and conducting thorough research to navigate the evolving landscape.
Key Points:
- Potential Value and Challenges: McKinsey predicts that generative AI could contribute $7.3 trillion annually to the global economy and automate 50% of work activities by 2060. While this suggests significant positive impacts on corporate profitability, businesses also face challenges like staff cuts and the need to restructure their business models.
- Winners and Losers: Beyond obvious winners like Nvidia, analysts caution that there might be losers across Europe and the United States. Companies in sectors such as IT services, consulting, media, information, and education are under scrutiny, as investors assess their potential for AI disruption.
- Deflationary Effects and Market Share: AI’s impact may not be universally positive. Negotiations for price cuts and the erosion of market share by staff-light newcomers could lead to sales growth reduction and share price underperformance. Sectors like IT services may face demands for lower prices as the need for human coders diminishes.
- Concerns and Market Reactions: Some companies have already experienced market reactions due to concerns about AI. French outsourcing firm Teleperformance and US-based Taskus, which manage call centers vulnerable to automation, have seen a 30% decline in their stock prices. Similarly, educational service providers like Pearson and Chegg have faced challenges as student interest in AI-powered bots affects customer growth.
- Selective Investing and Uncertainty: Investors are urged to exercise caution and conduct thorough research when seeking AI exposure. Indiscriminate investing is discouraged, and careful consideration of how companies are dealing with the AI transition is essential. While some IT services stocks may seem attractive, uncertainty surrounding AI adoption has deterred certain portfolio managers from investing.
As the initial buzz around AI settles, investors are taking a closer look at the risks and opportunities associated with AI adoption. While generative AI has the potential to revolutionize industries and drive economic growth, there are challenges and uncertainties that businesses must navigate. Investors are advised to be selective, conduct their own research, and consider the impact of AI on companies’ profitability and market positioning. By doing their homework, investors can make informed decisions and navigate the evolving AI landscape successfully.