The launch of ChatGPT in November 2022 was a watershed moment in artificial intelligence (AI), leading it to mainstream adoption. According to UBS analysts, the event has spurred significant investment and technological development with potential impacts on all economic sectors.
In a recent note to clients, the bank's strategists stressed that while AI adoption is in its early stages, its investment potential is substantial.
“In the early innings of the AI era, we advise investors to focus on vertically integrated players in the AI value chain,” he wrote, highlighting businesses with strong competitive positioning and clear evidence of monetization. Combine paths.
The potential size of the AI market is huge, with estimates ranging from Bloomberg's $1.3 trillion to McKinsey's $4.4 trillion by 2032. UBS suggests that annual revenue related to AI could exceed $1 trillion in the next decade.
This growth is expected to be driven by productivity improvements from AI tools for knowledge workers, who number around 1 billion globally. For example, developers using AI tools like GitHub Copilot can code up to 55% faster, and customer service operations can be 30-50% more efficient with generative AI.
UBS outlines an investment framework with three layers of the AI value chain: enablement, intelligence, and application layers.
Physical infrastructure at the enablement layer, such as AI data centers, is essential for training and running generative AI models. UBS projects that annual capital spending for this layer will reach $331 billion by 2027, driven by investments in AI servers and data center infrastructure.
“Most of the value in the enablement layer is likely captured by AI servers,” notes UBS.
“Due to the scale of AI compute, most companies will likely consume compute resources in the form of cloud services. As a result, we expect $185 billion in value creation by 2027.
The intelligence layer includes generative AI algorithms and large language models (LLMs) that use computing resources from the enablement layer. Although still in the early stages of monetization, this layer is expected to see strong growth due to its fundamental role in the development of AI.
UBS highlighted, “We expect this layer to show the strongest growth in 2027 given its small base.
Finally, the application layer, which includes AI-powered software applications and services, offers the most monetization potential, UBS strategists said. However, it is difficult to quantify the opportunities within at this stage, he added.
This layer includes tools like AI co-pilots for coding and personal assistants, which have already demonstrated significant productivity gains. Microsoft's GitHub Copilot, for example, is set to hit more than $100 million in revenue in 2023 and grow 40% year-over-year with 1.3 million users.
“With a 50-60% increase in developer productivity, we expect software code creation to accelerate,” the strategists wrote.
For the near term, UBS said it sees the biggest opportunities in the enabling layer of AI. The bank still expects the proportion of applications in the enablement and intelligence layers to show limited bottom-line profitability for the application layer during the early stages of generative AI's cyclical and structural ramp-up.