Artificial Intelligence

Inflection Point

Artificial Intelligence (AI) is the ability of machines to perform tasks that would normally require human intelligence. The rise in computer power, along with digital data, is what makes AI important today. Although forms of AI have existed since 1956, the next phase of artificial intelligence is only recently visible[1]. A recent report by UNESCO estimates that artificial intelligence research grew 50% from 2015 to 2019. The combined research growth, along with an increase in spending, is creating a technological land rush in the field of artificial intelligence. The World Intellectual Property Organization has highlighted AI as one of the most rapidly growing areas of issued and filed patent applications. It has also been identified as one of the key frontier digital technologies along the Internet of Things (IoT), blockchain, the metaverse, big data, and cloud computing.

The next wave of artificial intelligence is rapidly approaching. For instance, Artificial General Intelligence (AGI) is a strong form of AI; and AGI has recently made a breakthrough in technological advancement. AGI is a machine that can match a human’s cognitive capacity to perform any task, but with vastly improved efficiency.

The best example of what AGI could possibly resemble is OpenAI, a private company that Sam Altman and Elon Musk started. Recently, OpenAI released a large language model called ChatGPT that demonstrates the potential of AGI. ChatGPT is a chatbot that emulates forms of human intelligence. For example, ChatGPT can pass the Turing Test, a way to measure a machine’s intelligence. Additionally, ChatGPT can pass the United States Medical Licensing Exam and the Bar Exam. In summary, the advancement of AI is impacting every sector and industry. In addition to Open AI, there are several leading commercial AI research labs that are working on AGI, such as DeepMind, a British subsidiary of Alphabet, and Meta AI Research.

The best way for investors to capitalize on the advancement in AI is through sectors that implement AI-based tools and companies that use AI to increase productivity and efficiency.

[1] The field of Artificial Intelligence (AI) AI was born in 1956 by John McCarthy at Dartmouth Research Project.

Sectors

At O’Neil Global Advisors we focus on small capitalization companies in disruptive themes and sectors like artificial intelligence. Similar to the Internet, artificial intelligence will modernize and reshape many industries. AI is already used to some degree in many everyday applications, such as web search, user-targeted advertising, and software agents like Apple’s Siri, Amazon’s Alexa, and Google Assistant. But, with new advances, AI will enable many other tasks like allowing vehicles to drive themselves, computer programs to discover drug therapies, and software to write code for developers instead of the other way around. Initially, the sectors that should benefit the most from AI are Technology and Health Care.

Technology: Numerous technology companies are using artificial intelligence today to create new products and services. For example, BaiduBIDU
(NASDAQ: BIDUIDU
) has developed a tool called Deep Voice that uses AI to clone voices in a matter of seconds. Baidu uses the same technology to create a tool that reads books to you in the author’s voice. The entire process is automated due to the help of AI. Additional technology companies that are implementing new forms of artificial intelligence today are the following:

• Alphabet (NASDAQNDAQ
  : GOOGL) has established Google AI, a research division of Alphabet that is dedicated to artificial intelligence. The most notable products to come out of Google AI are TensorFlow, which allows for neural networks to be used by the public. Additionally, Alphabet implements AI into YouTube to automatically detect and remove violations. Utilizing AI has resulted in an 85% reduction in content that violates YouTube’s policies.
• Meta PlatformsFB
  (NASDAQ: META) uses AI to add structure to its data sets. For example, Meta Platforms uses DeepText, a text understanding engine, to identify and interpret content in multiple languages. It then uses AI to automatically remove derogatory images and text from its platform.
• MicrosoftMSFT
  (NASDAQ: MSFT) uses artificial intelligence in many of its products today. However, the company is expected to increase the use of AI in its products significantly in the coming years. Not surprisingly, Microsoft recently announced an additional $10 billion investment in Open AI, following on its previous investments of $1 billion in 2019. Microsoft is speculated to use ChatGPT- functions in many of its products, such as Microsoft Office and Bing, the company’s search platform.

Exhibit 1: Technology Companies

Health Care: Biotechnology companies are applying AI to drug development, potentially creating new medicines. Traditionally, Biotechs use a loose estimation framework for drug discovery that is suboptimal and inefficient. However, Biotechs are now using large data sets with the help of AI to identify patient response biomarkers. Morgan StanleyMS
believes early-stage drug development success rates enabled by AI could lead to a $50 billion opportunity. Subsequently, Biotechs are increasing their R&D budget to incorporate more spending on AI:

Exhibit 2: AI Spend as % of Biopharma R&D

Investors that want AI exposure through Biotechs can benefit from considering the following companies:

Exhibit 3: Health Care Companies

Conclusion

The recent advancement in artificial intelligence will have a profound impact on numerous sectors. Artificial intelligence will impact global productivity like the Internet impacted global connectivity. The two sectors that are currently benefiting the most from AI are (i) Technology and (ii) Health Care. Investors can gain exposure to these groups by carefully considering the previously mentioned companies. The companies listed in this article are all large cap stocks as that is where most of the headline spending has been. However, we focus our research on finding smaller cap names for the portfolios we manage that will one day become the next mega cap. Alternatively , investors that are risk-averse and prefer ETFs instead of stocks can consider the following ETFs:

Exhibit 4: Artificial Intelligence ETFs

Jason Thomson is a Portfolio Manager for O’Neil Global Advisors, Inc. He covers fundamental equities while overseeing idea generation, portfolio construction, and managing expected returns. Jason made significant contributions to the data compilation, analysis, and writing for this article.

References

How ai could speed drug discovery. Morgan Stanley. (n.d.). Retrieved January 23, 2023, from https://www.morganstanley.com/ideas/ai-drug-discovery#:~:text=Biotechs%20are%20applying%20AI%20and,new%20drugs%20is%20costly%20guesswork.

Booz Allen. The Artificial Intelligence Primer. (n.d.). Retrieved January 23, 2023, from https://www.boozallen.com/content/dam/boozallen_site/sig/pdf/publications/the-artificial-intelligence-primer.pdf

Disclosure

No part of the authors’ compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed herein. O’Neil Global Advisors, its affiliates, and/or their respective officers, directors, or employees may have interests, or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein.

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