Investing in AI: It’s about how, not if

KEY TAKEAWAYS

• AI’s long-term impact could extend beyond the “Magnificent 7”— Apple, Microsoft, Amazon, Google (Alphabet), Meta, NVIDIA, and Tesla — to nearly all global industries.
• AI is still at the early stages of one of the most powerful technological revolutions since the internet.
• Investing in the full AI value chain — such as through an AI-focused ETF — could offer a broader approach compared to traditional tech sector investments.

AI IS JUST GETTING STARTED

Artificial Intelligence (AI) is showing up everywhere you turn, from self-driving vehicles to summarized product reviews. AI thrives on data, and we live in an increasingly digital world. In fact, AI market size is expected to reach $407 billion by 2027,¹ and BlackRock believes AI could disrupt the global economy over the next decade. (Learn more about digital disruption and AI).

Although the concept of AI has been around for decades, recent trends of advancements in semiconductor breakthroughs, data proliferation, and software design have converged to bring the field to an inflection point. AI has transcended its “buzzword status,” with businesses across sectors looking to integrate the technology to grow new revenue streams or improve efficiencies.

AI will bring new efficiencies and revenue opportunities to virtually all segments of the economy

Yet despite the recent attention on AI, we believe the AI theme is still in its early stages, presenting investment opportunities for long-term investors.

LOOKING BEYOND THE “MAG 7”

Certain areas of the AI space continue to attract more headline attention than others, like the select group of mega-cap tech companies known as the “Magnificent 7”.

Focusing on the Mag 7 illustrates the potential emphasis on “picking a winner now” when investing in AI. The S&P Technology Select Sector Index has exhibited notable disparities between top and bottom performers. The difference between top-decile and bottom-decile technology stocks year-to-date is about 47.4%.² Long-term thematic AI investing is not just about investing in today’s largest tech stocks it is about identifying underappreciated areas within AI that are well-positioned for long-term growth and going beyond today’s market leaders.

HOW TO CAPTURE THE FULL AI VALUE CHAIN

The AI value chain includes companies and industries directly contributing to AI’s growth, including software, hardware, and infrastructure. A few key examples include:

GENERATIVE AI

• Core AI models designed to generate new and original content
• Specialized chips essential for training and running AI models

Did you know?
Worldwide AI chip revenue is projected to increase to $71 billion in 2024, marking a 33% increase from 2023.³

AI DATA AND INFRASTRUCTURE

• Operators of AI workloads & data centers, providing the infrastructure needed for generative AI
• Chips that support broader AI applications
• Infrastructure for data centers, crucial for storing and processing vast amounts of data

Did you know?
The U.S. data center market saw the largest pricing increase of all commercial real estate assets in 2023.⁴

AI SOFTWARE

• Databases & related software tools that facilitate data management & AI deployment
• Enterprise software enhanced with AI capabilities to improve business processes
• Consumer software integrated with AI features, enhancing user experiences and functionality

Did you know?
AI software spending is predicted to grow from $124 billion in 2022 to approximately $298 billion by 2027.⁵

AI SERVICES

• IT consulting or service firms that specialize in the implementation and management of AI technologies

Did you know?
It is estimated that over 80% of enterprises will have used generative AI by 2026, up from less than 5% in 2023 — creating demand for AI-as-a-service providers.⁶

These categories represent the diverse and evolving landscape of AI. By owning the full value chain of AI industries, investors can seek to capture a broader spectrum of companies and reduce the risk of overreliance on a few dominant players. This approach may allow for exposure to both established and emerging innovators and enablers. A thematic ETF focused on these areas can offer a streamlined approach to AI.

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CONCLUSION

AI is still at the early stages of one of the potentially most powerful technological revolutions since the birth of the Internet. AI may introduce new efficiencies and revenue streams across sectors of the economy. As this technology matures, investors can turn to AI to complement the core exposure of their portfolios or to replace their traditional tech exposure. AI-focused ETFs can offer a streamlined way to tap into potential diverse opportunities with a single trade.

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Originally Posted August 15, 2024 – Investing in AI: It’s about how, not if

^© 2024 BlackRock, Inc. All rights reserved.

¹ Source: Forbes, “24 Top AI Statistics and Trends in 2024.” June 15, 2024.

² Source: Morningstar, as of 7/31/2024. Based on stocks in the S&P Technology Select Sector Index. Top decile funds are up 37.3% and bottom decile funds are down –10.1%.

³ Source: Gartner, “Gartner Forecasts Worldwide AI Chips Revenue to Grow 33% in 2024.” As of May 29, 2024. Forward-looking estimates may not come to pass.

⁴ Source: CBRE “North American Data Center Pricing Nears Record Highs, Driven by Strong Demand and Limited Availability”, March 7, 2024.

⁵ Source: Gartner “Forecast Analysis: AI Software Market by Verticl Industry, 2023–2027”, March 27, 2024. Forward-looking estimates may not come to pass.

⁶ Source: Gartner, Catherine Howley, “Gartner Says More Than 80% of Enterprises Will Have Used Generative AI APIs or Deployed Generative AI-Enabled Applications by 2026.” As of October 11, 2023. Forward-looking estimates may not come to pass.

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