Understanding the greatest investment opportunity of your lifetime

Note: The interview was filmed on Tuesday, 21 May, 2024. You can watch the video or read an edited transcript below. 

Make no mistake, Artificial Intelligence (AI) is one of the greatest investment opportunities of our lifetimes.

This is not a matter of tulips, the dotcom boom, or Beanie Babies. No, this is the real deal, and it will have far-reaching impacts across most walks of life—for better or worse.

Ask the average punter on the street exactly what AI means, however, and most will talk about large language models like ChatGPT or Bard. Some might mention chip manufacturers, robotics and healthcare advancements. After that, the air gets pretty thin.

And fair enough. The space is still in its infancy, developing quickly, and we're only beginning to understand how the technology can be used, and who will be responsible for proliferating it.

To help get our heads around the space a little better, I recently sat down with GlobalX Investment Strategist, Billy Leung.

He sees three factors as the major drivers for why AI has come on so fast, and why it will continue to grow rapidly:

1. Technical advancements - Leung notes that chip computing power has gone up about 10x, whilst chip costs have come down 16x - "Right now, chips are more powerful and more affordable," he adds.
2. Companies are pushing this innovation - According to Leung, about 20 years ago only about half of Nasdaq companies were profitable. "Fast forward to the end of last year, over 80% of these companies are profitable net cash and also positive fee cash flow," notes Leung, adding that R&D is subsequently much more sustainable.
3. Acceptance of industry - The final driver has been the acceptance of AI across multiple different industries, according to Leung: "Unlike the PC or even the internet era, where there was some friction between different industries, they're all very willing to apply AI - for example, in healthcare, financials and retail as well".

For more on how Leung is seeing the opportunity, why the value added by AI is sustainable, and why there is room for multiple players, make sure to check out the video.

Edited transcript

Chris Conway: Hello and welcome to Livewire Markets. My name is Chris Conway. On today's episode of The Pitch, we are discussing everything you need to know about AI development. And to do that, I'm joined by Billy Leung, who is the investment strategist at Global X. Billy, thanks for joining us today.

Billy Leung: Thanks for having me.

Chris Conway: Billy, we're here to talk about AI today. It's obviously a huge area of interest for investors. I think sometimes people get caught up in the AI moniker and don't really understand the nuts and bolts of it all, what sits underneath that. What are some of the key technological advancements and real-world applications in the AI space?

Billy Leung: You're correct in saying artificial intelligence, AI, has been a household topic everywhere, and I think it really gets misrepresented, sometimes, in terms of where it goes. So if you look at the techniques that goes into AI, there's only a few that are really making strong advancements.

For example, there's machine learning; that's making a lot of big strides. So we see that being used in the consumption or the retail space. Companies such as Amazon (AMZN) are using machine learning for better data analytics or even just better targeting.

If you look at the second part of this artificial intelligence, we also have natural language processing, which we've seen in generative AI, we've seen in ChatGPT as well. But there's also a part where I think a lot of people not seeing, where it's actually making a lot of difference in our society, which is the robotics and computer vision. There's a lot of AI that's been applied in these two areas, and it's actually impacting healthcare supply chain and a lot of logistics, and that's where a lot of value is coming from as well.

Chris Conway: Billy, you and I have both been in markets for quite some time, both been research analysts as we were talking about off camera. Why has AI come on so fast compared to some of the other themes that you and I have seen over the journey here?

Billy Leung: Yeah, that's a good question. A lot of people have been asking me as well, what's been happening in the past 20 years, what's happened in the past 10 years? And you're right, AI is nothing new. It's been around for a long time, maybe 20 years or even longer in terms of where research is coming from.

But in the last 10 years, what we have seen is that there are more and more applications of artificial intelligence. Secondly, and this is really interesting, we've actually seen artificial intelligence reach human performance much faster.

In terms of speech recognition, that came in about 20 years ago, and that took about 10 years for it to reach human level. But in terms of coding, that's actually taken two years for AI to reach human level.

So to answer your question, what's really happened in the last decade is three things.

The first thing is technical advancements. We've seen chip computing power go up about 10 times. And number two is the chip's cost has actually come down by about 16 times. So right now, chips are more powerful and more affordable.

The second market factor is actually the companies that are pushing this innovation. So if you look at these tech companies, they used to be very weak financially. So about 20 years ago, I'm sure you'll know, all these Nasdaq companies, only half of them are profitable. But if you fast-forward to the end of last year, over 80% of these companies are profitable, net cash and also positive free cash flow, which means that the research and development is much more sustainable.

And I think the third thing that's really happened in the past 10 years, to push AI, is the acceptance of all these different industries. So unlike the PC or even the internet era, where there was some friction between different industries, we're seeing very limited friction between industries, and they're all very willing to apply AI - for example, in healthcare, financials and retail as well.

Chris Conway: Billy, you talked there about some of the companies and the financial health that they now exhibit. More broadly, AI as a theme has added about 3 trillion in value to the S&P 500 over the last 12 months. So it's been an incredible boom. Is this real value, do you think? Or is it dotcom bust 2.0?

Billy Leung: So I think there's two parts, right? There's always two parts to looking at value creation or market growth. One of them is, is this market growth driven by earnings? Is it an earnings expansion? Or is it a valuation expansion...which is more of the concern, right? If valuation expands too quickly, that becomes a bubble potentially.

So what we've seen, for example, using your observation is the Nasdaq has gone up by about 35% in the past 12 months, added about $6-7 trillion. But if you look at the valuation expansion, it's only gone up by 36 times to 39 times PE. So the valuation expansion has only been 8%, whereas most of it has actually come from earnings. So the companies are actually delivering the earnings growth and delivering what they're supposed to actually provide to investors.

Chris Conway: Billy, the industry has responded to the opportunity emphatically, shall we say. What does this mean for investors?

Billy Leung: I think initially, when there's a technological shift or when there's an innovation disruption, so to speak, a lot of investors try to identify the market leaders. That is where the leaders, again being cash-rich, have the ability to develop the technology, and are at the forefront. So this is where the low-hanging fruits come in.

So whenever there's all these new trends, it's always trying to identify the leaders, which is why there's a trend called the Mag Seven, because people are trying to identify who are the most likely leaders or most likely companies to succeed in this technological shift.

Chris Conway: One final question, if I may, Billy, is this going to be an environment where its winner takes most or winner takes all, do you think? Will the incumbents or the strongest be the only ones that survive 10, 15 years from now?

Billy Leung: It's a big question because AI is big. In terms the space, it's not just about one certain area. We are seeing software, we're seeing hardware, we're seeing cloud infrastructure, so it's very hard to identify one player who will take everything. There's obviously going to be big players, but there's also going to be very [clear] market leaders in different kinds of subsets, which we need to take a note of as well.

Chris Conway: Billy, thanks for sitting down with Livewire.

Billy Leung: Thank you.

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The Global X Artificial Intelligence ETF (ASX: GXAI) invests in global companies involved in AI development, AI-as-a-service, provide AI compute power, or design and manufacture AI hardware.

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