Avithana Chitmongkulthong
Written by Justin Leverenz, CFA, Chief Investment Officer, Emerging Market Equities
We may remember the first season of the artificial intelligence (AI) saga for a fairly uncomplicated story: markets were quick to reward semiconductor and hardware companies for running AI (some deserved, some didn’t), especially since… The AI wave has happily coincided with the periodic decline of inventories in the technology supply chain. We believe Season 2 is expected to include more nuanced discussions about the ultimate impact of AI, which could be important in determining long-term winners in this space. As investors in emerging markets, we are following this story closely as a group of emerging market companies seek to expand their competitive edge in enabling generative AI solutions.
AI Story #1: Enterprise vs. Consumer
The use of ChatGPT has become ubiquitous, from Microsoft1 (MSFT, MSFT:CA) has raced ahead with… Tools like Copilot and IT services companies are demanding an increasing number of AI projects. One might think that companies should see immediate value in adopting AI, but the enterprise world is plagued by disparate data, privacy and regulatory constraints, and risk-averse expectations of seismic change, which can make it difficult to achieve significant efficiency gains.
Previous technology revolutions have been driven by motivated consumers, but here too, we need to see truly useful AI applications that can run on our devices. Smartphones may make a comeback if compelling use cases lead to a global replacement cycle. We’re seeing PC makers calling some of their products “AI PCs” – do we need a new PC spin?
AI Story #2: Attack vs. Defense
In the fiscal year ending in January 2023, Nvidia1 (NVDA, NVDA:CA) reported data center revenue of about $15 billion, which is where its AI business is located.2 For the year ending January 2025, Nvidia customers are expected to spend nearly $100 billion3 On artificial intelligence chips. What will the return on investment look like when these spending plans seek to generate favorable revenues?
- In our opinion, if we assume that revenue from search and social media is powered by AI, capital expenditures are only defensive and may allow existing platform giants like Meta (META, META:CA) and Google1 (GOOG, GOOGL) to continue their dominance.
- However, in our opinion, to maintain this high spending, companies need to continue to create new revenue streams. This can be done through material cost reductions, such as customer service automation. Custom software development may accelerate, impacting software-as-a-service (SaaS) companies, or accelerating medical drug discovery may transform healthcare.
Space is evolving rapidly, and the moats may not be as wide as they seem. Therefore, optimism about future possibilities should mitigate the risks of disruption. Amidst these possibilities, it is clear that we are heading into the great unknown.
Emerging market companies have played an integral role in enabling AI
In the world of emerging markets, a range of companies and their underlying semiconductor technologies have played a critical role in enabling generative AI solutions, including Nvidia’s data center graphics processing units (GPUs).
- Taiwan Semiconductor Manufacturing Company1 Everything that is advanced in the field of global semiconductors looms on the horizon. Thanks to generative AI, their competitive edge has now expanded beyond chip production to include advanced packaging that effectively “slices” memory and graphics processor chips together in a way that helps deliver a generational jump in performance while reducing power consumption.
- SK Hynix and Samsung Electronics1 (OTCPK:SSNLF) helped pioneer the market for high-bandwidth memory that dramatically improves the memory throughput of GPUs. Semiconductor technology is perhaps the most important in enabling GPU massive parallel computing performance acceleration.
We believe the emerging market world is ready for new waves of hardware innovation and design ingenuity that go hand in hand with AI products. These spaces are more complex, but we need to keep an eye on the development of smartphone-related semiconductors, which is where MediaTek1 ( OTCPK:MDTTF ) or specific original design manufacturers that may win new business from the chip design efforts of large platforms, including the likes of Google, Meta, and Amazon (AMZN, AMZN:CA).1
A future for the curious
The first season of AI was all about “see it, believe it.” Season 2 is expected to be more layered and could lead to very different outcomes for stock prices. In the face of all this hype, Invesco Emerging Markets Fund remains a long-term investor in a highly diversified business with growth resilience, a sustainable competitive advantage, strong governance (and thus capital allocation) and a range of real options built into its franchises that we believe will emerge over many years. .
Footnotes
- 1As of March 31, 2024, Microsoft, Meta, Google, Nvidia, and Amazon represent 0% of Invesco’s Emerging Markets Fund. Taiwan Semiconductor Manufacturing Company, Samsung Electronics, SK Hynix, and MediaTek represented 9.3%, 6.4%, 0.8%, and 0.2%, respectively.
- 2Source: Nvidia Annual Report March 2023
- 3Source: Bernstein Research May 2024
Technology companies in emerging markets play a major role in the AI story By Invesco USA
